Defense Commissaries
Additional Small Business Opportunities Should Be Explored Gao ID: GAO-03-160 December 12, 2002Some 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.
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.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-160, Defense Commissaries: Additional Small Business Opportunities Should Be Explored
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Report to the Ranking Minority Member, Committee on Small Business and
Entrepreneurship, U.S. Senate:
United States General Accounting Office:
GAO:
December 2002:
Defense Commissaries:
Additional Small Business Opportunities Should Be Explored:
Highlights of GAO-03-160, a report to the Ranking Minority Member,
Committee on Small Business and Entrepreneurship, U.S. Senate
DEFENSE COMMISSARIES: Additional Small Business Opportunities Should
Be Explored
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.
What GAO Recommends:
GAO is recommending that the Department of Defense study the benefits
and costs of developing private label products for sale through
commissaries. GAO also suggests that the department consult with
the Small Business Administration on the removal of a legal hurdle
that that may deter some small businesses from dealing with
commissaries.
www.gao.gov/cgi-bin/getrpt?GAO-03-160.
To view the full report, click on the link above.
For more information, contact Lawrence Dyckman at 202-512-9692 or
dyckmanl@gao.gov.
[End of section]
GAO-03-160:
Contents:
Letter:
Results in Brief:
Background:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Examples of the Terms of DeCA‘s
Performance-Based Agreements:
Appendix III: Steps in DeCA‘s Category Management Process:
Appendix IV: Top 20 Private Label Product Categories in the Supermarket
Industry, 2001:
Appendix V: Comments from the Department of Defense:
Appendix VI: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: DeCA‘s Performance-Based Agreements for 2000 and 2001:
Table 2: Estimated Percent of Small and Foreign Businesses and Sales of
Products by DeCA Commissaries, August 2000 through May 2001:
Abbreviation:
DeCA: Defense Commissary Agency:
United States General Accounting Office:
Washington, DC 20548:
December 12, 2002:
The Honorable Christopher Bond
Ranking Minority Member
Committee on Small Business and Entrepreneurship
United States Senate:
Dear Senator Bond:
For well over a decade, the U.S. retail grocery industry has
increasingly required grocery store suppliers to pay a variety of fees
to place their products in stores. These fees, called ’slotting fees“
or ’slotting allowances,“ help determine which products supermarkets
will sell and where they will place those products on their shelves.
Proponents of slotting fees maintain that the fees help pay the costs
of introducing new products to the marketplace, such as the costs of
reallocating shelf space and reprogramming scanner equipment and that
the fees help allocate the risk of product failure between suppliers
and retailers. Some retailers view slotting fees as a way to reduce
their risk in trying a new product and say that a manufacturer‘s
willingness to pay slotting fees indicates the manufacturer‘s
confidence in a product‘s success. Opponents of the practice, including
some product suppliers and small business groups, maintain that it can
prevent smaller manufacturers from competing if they cannot afford
the fees.
Many large grocery retailers have also adopted a business technique
called ’category management“ for assessing the sales potential of
products within a particular category, such as ice cream or other
frozen foods, selecting the products with the best potential and
allocating shelf space to these products. Retailers may manage product
categories themselves, with recommendations from suppliers; select
various ’category captains“ (usually the leading manufacturers for each
product category) to help them manage the categories; or turn over
management of the categories to the category captains. While proponents
of category management view it as having potentially significant
benefits for suppliers, retailers, and consumers, others are concerned
that when a retailer relies heavily on a category captain,
anticompetitive behavior may arise.
The Department of Defense operates supermarket-type stores called
commissaries for the use of active and retired military personnel and
their families. Managed by the Defense Commissary Agency (DeCA), these
commissaries number about 280 worldwide, with sales totaling about
$5 billion per year. DeCA‘s overall goal is to provide quality products
at the lowest possible cost. Like commercial supermarkets, commissaries
sell name brand products and nonbranded products such as produce, fresh
fish, and ground beef. DeCA encourages small businesses to sell
products through commissaries. Even so, to assure that DeCA can supply
the name brand products its customers desire, federal law allows DeCA
(as well as other federal agencies) to purchase name brand products
without competition and without setting aside a portion of this
business for small businesses. The Small Business Administration
generally considers businesses with 500 or fewer employees to be small
businesses.[Footnote 1]
You asked us how DeCA is managing its product purchases. Specifically,
you asked us to determine the extent to which (1) DeCA requires grocery
suppliers to pay for shelf space in commissaries, (2) DeCA‘s large
suppliers select the products that are sold by commissaries,
(3) products sold by commissaries are produced by small businesses and
foreign businesses, and (4) small businesses face barriers to selling
their products in commissaries as well as whether opportunities for
small businesses could be improved.
Results in Brief:
The Defense Commissary Agency does not require its suppliers to pay for
shelf space in commissaries; the agency accepts and stocks products for
sale without charging slotting fees. However, in recent years the
agency participated in a small number of promotional arrangements,
called ’performance-based agreements,“ under which its suppliers paid a
negotiated fee for preferred product display space. In calendar
year 2001, for example, the Defense Commissary Agency had 14
performance-based agreements covering products sold by 10 of over 2,700
of its suppliers. These agreements were negotiated separately from
decisions to stock products, according to agency officials. The revenue
from these performance-based agreements--about $1.2 million in 2001--
has been used to fund commissary construction. The agency discontinued
offering its suppliers performance-based agreements for 2002 to assure
that revenue obtained through these agreements was not limiting
vendors‘ capability to reduce product prices and because the Congress
had provided for funding commissary construction.
The Defense Commissary Agency‘s large suppliers do not select the
products that the commissaries sell; instead, agency officials have
sole responsibility for category management decisions. When the agency
assesses the performance of a category of products, such as frozen
dinners or ice cream, it relies on market data that it obtains from an
independent source. The agency also obtains product sales data and
selection and display recommendations from suppliers within that
category. These suppliers include both leading manufacturers--such as
Kraft Foods, Inc., and General Mills, Inc.--and other companies selling
and distributing products in that category that decide to participate
in the review. The agency reconsiders its selections if requested to do
so by suppliers.
Based on a statistical sample, we estimate that 53 percent of
businesses producing products which the agency sold were small
businesses and that these businesses produced about 24 percent or about
10,900 of 45,200 products sold by commissaries, during the period we
sampled. We also estimate that the sale of these products totaled about
$214 million, or about 7 percent of the dollar sales of commissaries
during the period. In addition, we estimate that about 13 percent of
the businesses producing products which the agency sold are foreign
businesses and that these businesses produced about 6,500 products, or
about 14 percent of the products sold by commissaries during the
period. We also estimate that the sales of products produced by foreign
companies totaled about $551 million or about 17 percent of the dollar
sales of commissaries over the period. These estimates are based on a
statistical sample of 700 of approximately 45,200 products sold by
commissaries during the 10-month period from August 2000 through
May 2001.
Businesses face a legal hurdle in selling brand name products to the
Defense Commissary Agency for resale. Federal law requires that a name
brand product must have been sold on a regional or national basis
through grocery stores or other retail operations consisting of
multiple outlets before the agency can purchase a product for resale
without competition. Agency officials do not know precisely how often
companies may be affected because companies do not inform the agency
when they decide not to propose products for acceptance. Also, some
small businesses may not sell to the commissary system because it
appears to present less opportunity than other large grocery
supermarket companies since the assortment of products which
commissaries stock is smaller in comparison, the distances between
commissaries is greater, and the costs of distributing products to
commissaries may be increased. Nevertheless, agency officials said that
they are eager to add products from small businesses and are looking
for products with positive sales records, as well as companies with the
financial capability to sustain operations and the production capacity
to meet demand for their products if accepted. Because the legal
requirement apparently limits the consideration of products proposed by
small businesses, the agency may wish to consult with the Small
Business Administration on whether to suggest to Congress that the
provision be modified or removed from the law.
There also would be opportunities for small businesses if the agency
were to sell private label products. Major grocery retailers, except
for the agency, have developed successful private label products--
private label products have grown to account for over 20 percent of
industry unit sales and a 16 percent share of dollar sales in 2001,
according to industry data. Private label products have low prices
compared to name brand products and have also provided retailers with
higher profit margins according to industry information. Agency
officials recognize that private label products are successful and that
commissary customers are very likely to buy private label products if
they are offered at commissaries. Yet, agency officials also commented
that a private label program could be difficult for the agency to
initiate and implement. They said that introducing private label
products could cause the agency‘s current suppliers to raise prices and
withdraw the labor support they now provide and thereby raise the
possibility that the overall benefits of commissary shopping may be
reduced. We believe these issues would need to be carefully considered
to determine if private label products are in the best interest of
commissary customers. The agency‘s Director agreed that it would be
reasonable to perform a study to determine if a private label product
program could enhance the commissary benefit. Because the sale of
private label products is a significant and successful competitive
trend in grocery retailing, provides products at the lowest possible
cost, and offers opportunities for small businesses, GAO is
recommending that the Department of Defense assess the benefits, costs,
and implementation issues associated with selling private label
products through commissaries.
The Department of Defense reviewed a draft of this report, concurred
with our recommendations and stated that it will implement them.
Background:
DeCA commissaries are in business to provide a significant non-pay
compensation benefit to military families; they sell food and household
items tax free at cost plus a 5 percent surcharge. Military servicemen,
retirees, and their families consider the opportunity to shop and save
through the commissary a highly important benefit of military service.
DeCA is striving to achieve an overall savings of 30 percent for its
patrons compared to retail supermarket prices. DeCA‘s operating
expenses are paid primarily through an annual appropriation of about
$1 billion. DeCA was formed in 1991, and its headquarters are at Fort
Lee, Virginia.
Under federal law, DeCA may purchase name brand products without
competition and thereby supply its customers with products they
prefer.[Footnote 2] Also, when purchasing products without seeking
competition, requirements regarding purchases from small businesses
become inapplicable.[Footnote 3] For the remainder of the products
which commissaries sell for which there is not demonstrated customer
preference for a specific brand, DeCA follows federal procurement
requirements, seeking competition and striving to purchase a portion of
its products from small businesses.
The Federal Trade Commission has been reviewing slotting and category
management practices as part of its responsibility for preventing
business practices that may have a harmful effect on
competition.[Footnote 4] Within the commission, the Bureau of
Competition is responsible for investigating such illegal practices,
and for taking enforcement action if it finds illegal activity. The
Bureau of Competition views slotting allowances as covering a very
broad range of business conduct, some of which--such as commercial
bribery[Footnote 5]--are unlawful. Other slotting practices are legal
in competitive markets, according to the Federal Trade Commission, such
as ordinary price discounts that are passed through to consumers. The
Deputy Director of the Bureau of Competition has testified that
slotting allowances are unlikely to harm competition when there are
payments of reasonable amounts to compensate a retailer for stocking a
new unproven product. On the other hand, the Deputy Director also
advised that slotting practices may be of competitive concern if they
involve the exclusion of rivals.[Footnote 6] The following fees
illustrate those in use in the industry according to the Federal Trade
Commission‘s workshop report on slotting practices and
industry studies:
* Slotting allowances--lump-sum, up-front payments from a manufacturer
or producer to a retailer to have a new product carried by the retailer
and placed on its shelves.
* Pay to stay fees--fees paid by a manufacturer to keep existing
products on retailers‘ shelves.
* Display fees--fees paid by a manufacturer for shelf space and for
placing products in particular locations within a store, such as on
eye-level shelves or on displays at the end of shelves. There are
concerns that some payments may limit or disadvantage a rival‘s access
to shelf space.
* Failure fees--fees paid by a manufacturer to a retailer in the event
that a product does not sell as well as expected and must be removed
from store shelves and inventory.
DeCA Does Not Use Up-Front Slotting Fees:
DeCA does not as a matter of course require companies supplying grocery
products to make payments to obtain shelf space in commissaries. DeCA
accepts and stocks products for sale without charge and in so doing has
not joined in the grocery industry practice of requiring up-front
slotting fee payments for shelf space.
Although DeCA does not use up-front slotting fees, DeCA has entered
into promotional arrangements, called ’performance-based agreements,“
under which suppliers paid DeCA fees for allowing specific promotional
activities. DeCA used these agreements to increase the funds available
for commissary construction. The agreements were based on suppliers‘
proposals and negotiations with DeCA, and the agreements authorized
suppliers to place products on special merchandizing racks, on
end-of-aisle displays, and on in-aisle display cases. The agreements
were negotiated separately from decisions to stock products, according
to DeCA officials. DeCA entered relatively few performance-based
agreements, and they provided modest income as table 1 indicates.
Table 1: DeCA‘s Performance-Based Agreements for 2000 and 2001:
Year: 2000; Number of agreements: 18; Product categories: Candy, pet
supplies, breakfast foods, butter, margarine, baked goods, cheese,
drinks, snack foods, and home care products; Estimated DeCA revenue:
$1.7 million.
Year: 2001; Number of agreements: 14; Product categories: International
products, snack foods, baked goods, drinks, frozen foods, health foods,
kitchen aids, and insecticides; Estimated DeCA revenue: $1.2 million.
Source: GAO‘s analysis of DeCA information.
[End of table]
In addition, our review showed the following:
* Only one company had performance-based agreements in both years.
* In calendar year 2001, the 14 performance-based agreements covered
products sold by 10 of over 2,700 of DeCA‘s suppliers.
* DeCA‘s performance-based agreements were not structured in a manner
that excluded the sale of other suppliers‘ products. Appendix II
contains examples illustrating the performance terms and the basis for
payments that DeCA received through its performance-based agreements.
While there have been relatively few performance-based agreements, the
concept has raised some concerns. In a 1998 report on DeCA contracting
activities, the Department of Defense expressed concern that (1) DeCA‘s
agreements were a form of selling space in commissaries, which is not
authorized, and (2) that the agreements were a cost to the suppliers
who may pass on those costs to military customers through increased
product prices.[Footnote 7] While DeCA officials disagreed with these
perspectives, DeCA decided not to enter additional performance-based
agreements for 2002. DeCA officials stated that they took this action
to assure there was not any possibility that the agreements were
limiting their suppliers‘ capability to reduce product prices, and
because revenue needed for commissary construction had been secured
through congressional action.[Footnote 8]
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.
DeCA officials do use category management techniques when selecting
products, and DeCA officials have sole responsibility for category
management decisions. DeCA adopted category management in the mid-1990s
because this technique was being recognized as a significant
improvement in grocery industry management practice. DeCA‘s category
managers and buyers who are assigned to DeCA‘s Marketing Business Unit,
located primarily at Fort Lee, Virginia, implement these techniques.
DeCA has divided its grocery business into about 170 categories of like
products, and it completed 164 reviews of individual product categories
from January 2001 through August 2002. Appendix III identifies the
general steps in DeCA‘s category management process, and DeCA‘s role
within this process.
DeCA category managers and buyers have the lead role in DeCA‘s category
management process. DeCA category managers and buyers told us that they
use data from Information Resources, Inc.,[Footnote 9] as a foundation
for making grocery product selection decisions. Information
Resources, Inc., supplies DeCA with sales data for each product in a
category for the commissary market, as well as comparative sales data
from other grocery retailers. This information allows DeCA‘s category
managers and buyers to have an overview of the performance of each
product over several time periods. In addition, DeCA category managers
and buyers meet individually with their suppliers during a category
review and are provided with product presentations and sales data
developed by the supplier or purchased by the supplier, along with the
suppliers‘ product selection and display recommendations. Suppliers who
make presentations to DeCA during a category review typically include
both leading manufacturers such as Kraft Foods, Inc; General Mills,
Inc; and PepsiCo, Inc; and distributors, brokers, and other companies
selling and distributing products in a category that decide to
participate in the review. According to DeCA officials, they do not
discuss or share the content of meetings with individual companies with
the representatives of other companies that participate in a category
review. After DeCA announces the results of a category review including
any changes in its selections and the distribution of its products,
DeCA will reconsider its selections if requested to do so by suppliers.
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. We estimate that the sale of these
products totaled about $214 million, or about 7 percent of commissary
sales, and we are 95 percent confident that the total lies between
$76 million and $352 million. In addition, we estimate that about
13 percent of the businesses producing products that DeCA sold are
foreign businesses and estimate that these businesses produced about
14 percent or about 6,500 of the products sold by commissaries during
the period. We are 95 percent confident that the total lies between
5,300 and 7,800. We also estimate that the sales of products produced
by foreign companies totaled about $551 million, or about 17 percent of
the dollar sales of commissaries, and we are 95 percent confident that
the total lies between $287 million and $815 million. For our
statistical sample, we selected 700 of approximately 45,200 products
sold by commissaries during the 10-month period.[Footnote 10] Table 2
provides additional details.
Table 2: Estimated Percent of Small and Foreign Businesses and Sales of
Products by DeCA Commissaries, August 2000 through May 2001:
Dollars in millions.
Small; Percent: 53; 95-percent confidence interval: 44 to 54; Total:
[Empty]; 95-percent confidence interval: [Empty].
Products; Percent: 24; 95-percent confidence interval: 21 to 27; Total:
10,900; 95-percent confidence interval: 9,400 to 12,400.
Dollar sales of products; Percent: 7; 95-percent confidence interval: 2
to 11; Total: $214; 95-percent confidence interval: $76 to $352.
Foreign; Percent: 13; 95-percent confidence interval: 10 to 17; Total:
[Empty]; 95-percent confidence interval: [Empty].
Products; Percent: 14; 95-percent confidence interval: 12 to 17; Total:
6,500; 95-percent confidence interval: 5,300 to 7,800.
Dollar sales of products; Percent: 17; 95-percent confidence interval:
9 to 25; Total: $551; 95-percent confidence interval: $287 to $815.
[A] While we could estimate the proportion of small and foreign
businesses, we could not reliably estimate the total number of
businesses. To do so would require knowledge of the number of products
in the population associated with each parent company identified in the
sample. The list from which the samples were drawn included product,
but not company, identification, and the population of companies that
produce products sold by DeCA is not known. Commissaries sales from
August 2000 through May 2001 totaled $3.278 billion dollars.
Source: GAO‘s analysis of DeCA data.
[End of table]
We developed estimates of this business activity because this data was
not available from DeCA. DeCA collects data on its suppliers with which
it has resale agreements. These suppliers include a mix of companies,
some of which produce products and others that are the distributors of
products produced by other companies. DeCA‘s database identifies the
companies that supplied it with each product, and its data includes
either the producer or the distributor, but not both.
We could not compare commissary sales of the products of small
business with private sector grocery supermarkets because the data
that are available are too limited. While scanner data on industry
sales are available, this information does not identify the size of the
companies that supply the products, according to industry officials.
Also, the U.S. Census Bureau, which conducts economic surveys of
manufacturing, does not collect data on the extent that the products of
small businesses are sold through individual commercial grocery
retailers. Census Bureau data shows that grocery manufacturing is
diversified, with over 22,000 companies participating in the sector,
and that over 21,000 of these companies had 500 or fewer employees.
Yet, the industry is more concentrated at the top--the 50 largest
companies in the sector accounted for about 51 percent of the
$422 billion in shipments attributed to this sector of the economy in
1997 (the latest data available).[Footnote 11]
Barriers Small Businesses May Face in Doing Business with DeCA:
Businesses face a legal hurdle in selling brand name products through
commissaries--a provision of law requires a minimum level of sales
before DeCA can consider a brand name product for purchase. In
addition, the commissary system has certain physical characteristics
that limit the number of products that commissaries sell and increase
the costs of distributing products to commissaries. These
characteristics affect the opportunities of businesses, including small
businesses, to present and sell products through commissaries.
In general, federal policy concerning small businesses is to (1) foster
their development and (2) to eliminate barriers to their growth. As
indicated by the Small Business Act and the U.S. Small Business
Administration, the United States is committed to preserving full and
free competition that leads to free entry into business to keep
capitalism efficient and foster innovation. Also, according to the
administration, the growth of small businesses is vital to preserve
competition, and its Office of Advocacy was created to help discourage
barriers to small business development and growth. Furthermore,
according to the administration, policymakers should find ways to level
the playing field for all businesses without compromising statutory or
agency specific goals.
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.[Footnote
12] This limitation was enacted in 1997, and a congressional committee
considering this legislation specifically stated in referring to this
provision that discount brands that are not sold by major commercial
grocery or retail store chains would not qualify as brand name
products.[Footnote 13]
DeCA officials said that the provision has, in part, had the effect of
limiting their consideration of products that have not yet achieved a
regional distribution, including products produced by small businesses.
DeCA officials do not know precisely how often companies may be
affected because companies do not inform DeCA when they are discouraged
from proposing products for acceptance by DeCA for this reason. DeCA
seeks products with positive sales records and companies with the
financial capability to sustain operations and the production capacity
to meet demand for their products if accepted for sale. DeCA does not
accept a product with an indifferent sales record or a product that may
not be as attractive to customers as those that are already in DeCA‘s
assortment. Nevertheless, DeCA officials said that they occasionally
accept products that appear to be popular in regional and local areas
even with relatively limited distribution--they are looking for and
eager to add products from small businesses that are innovative or
distinctive. In addition, DeCA officials said each product accepted for
sale must earn its place on the shelf and continue to sell well to
maintain its place in a commissary store and the commissary system.
When a product is added to DeCA‘s assortment, a competing product may
need to be removed to make shelf space available.
In addition, other factors affect whether or not a small business sells
products through commissaries. The commissary system differs, in part,
from some large grocery supermarket companies in the following
respects: the assortment of products, the distances between stores, and
the costs of distributing products to stores. According to DeCA
information, DeCA‘s assortment of products is limited by the physical
size of commissaries--commissary stores are about one fourth smaller on
average than typical commercial grocery supermarkets. Also,
commissaries are shopped intensively twice per month on days after
military paydays, and DeCA plans its stock assortment to assure that
commissaries have sufficient quantities of the items in highest demand
to meet these bimonthly shopping peaks. Due to these characteristics,
an average commissary stocks about 11,500 items--as much as 40 percent
fewer grocery items than large grocery supermarkets, according to DeCA
information. In addition, the wide spacing of commissaries limits their
sales in regional and local markets compared to other large
supermarkets chains in metropolitan areas that have high concentrations
of supermarket stores. Nearly half of all DeCA sales occur at about 55
of the largest commissary stores distributed across the continental
U.S. at major military bases. Moreover, DeCA does not have centralized
warehouses or a product distribution system within the United States,
as do other large supermarket chains. Therefore, DeCA requires that its
suppliers deliver or arrange to deliver products for sale, and these
deliveries must be frequent enough to assure that at least a minimum
quantity of each product is on the shelf each day. To meet
these requirements, many of DeCA‘s suppliers pay a distributor to
warehouse and deliver products to commissaries. 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.[Footnote 14] DeCA officials recognize the
strength of the industry trends in selling private label products, and
that commissary customers would likely purchase significant quantities
of private label products. The sale of private label products would
also provide some opportunity for small businesses. According to
officials of the Private Label Manufacturers Association, as many as
half of the association‘s membership of 3,200 companies may have 500 or
fewer employees.[Footnote 15] However, DeCA officials identified
operational issues that they believe may undercut the benefits of
having commissaries sell 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 have become a major form of retail trade in the
grocery industry. 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.[Footnote 16] These and other grocery retailers now use their own
private labels to sell thousands of products. 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. In addition, reports[Footnote 17] on the supermarket industry
indicate that private-label products:
* may capture 24 percent of grocery industry sales by 2006;
* make business sense because they offer a 20 to 40 percent price
advantage over national brands and, in addition, provide retailers a 35
to 40 percent margin compared to the 27 percent margin of national
brands; and:
* are perceived within the industry as promoting customer loyalty to a
retailer.
Sales of private label products vary significantly by product category,
and in some categories exceed 30 percent of the sales of a category.
The top 20 categories of private label product sales are listed in
appendix IV.
DeCA officials have been considering the industry trend toward private
label sales. In 1997, a limited evaluation of the private label concept
by DeCA staff suggested, at that time, that (1) DeCA customers appeared
to be demographically ideal purchasers of low cost private label
products, (2) a private label program would be impractical for DeCA
because it may not reduce overall prices and would require significant
operations changes; and, (3) it may be necessary for DeCA to respond to
industry trends by selectively carrying low cost alternative
products.[Footnote 18] In July 2000, DeCA started its ’Best Value
Items“ program, which offers name brand products at the lowest prices
DeCA can obtain. The Best Value Items program responds, in part, to a
commissary customer‘s request to DeCA‘s director for private label
products, and the recognition by DeCA that commissaries were at a
competitive disadvantage compared to private label programs in serving
some customers, such as its younger service members who desire the
lowest priced products. As of September 2002, DeCA‘s Best Value Item
program contained about 400 items and accounted for about 2.3 percent
of DeCA annual dollar sales, according to DeCA information.
In discussing the potential for private label products, DeCA officials
raised concerns about the effects of a private label program that
require serious consideration. DeCA officials said that the private
label concept may not increase customer traffic from current levels,
nor succeed in reducing product costs overall. 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. According to DeCA
officials, there would also be implementation issues such as (1) the
pricing of products, which may require a change in DeCA‘s legal
authority if variable pricing would be helpful; (2) the expense of
advertising DeCA private label products; and (3) controls over product
quality. Due to these concerns, DeCA officials have not performed a
thorough study of the potential for selling private label products.
On the other hand, the Department of Defense has stated that it is
important for the future of the commissary system to focus on the
emerging trends in the supermarket industry and for commissaries to be
positioned to retain their appeal. In addition, the department has in
the past expressed concern that discount retailing could lead to strong
competition for military members‘ business in common markets. 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. In addition, this requirement may
thereby have the effect of lessening the opportunities to implement the
federal policy of fostering the development of small businesses. We
recognize that even if this provision is removed from the law or some
other adjustment is made to the requirement to open the door to the
consideration of all small business products offered to DeCA, it is
uncertain whether there will be a positive effect on the sales of small
business products in commissaries because commissary shelf space is
limited and open to competition. 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.
Private label products may provide further opportunities for DeCA to
offer its customers good alternatives in low-cost grocery retailing.
The growth of private label products in the grocery supermarket
industry appears to be a compelling trend, with thousands of private
label products capturing a portion of sales in major national
supermarket chains, and significant portions of particular product
categories. Unless the potential for private label products is examined
more thoroughly than it has been thus far, along with a review of
implementation alternatives and the issues that can be expected to
arise if further steps in that direction were to be taken, the
potential for applying this successful retailing to the benefit of
commissary patrons will remain in question.
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.
In addition, to evaluate the potential to better serve commissary
customers, GAO recommends that the Secretary of Defense perform a study
to examine the benefits, costs, and implementation issues associated
with the sale of private label products through commissaries, and act
on study results, as appropriate.
Agency Comments and Our Evaluation:
We requested comments from the Department of Defense on a draft of this
report. The department concurred with our recommendations and its
comments are presented in appendix V. Specifically, the department
stated that (1) it would consult with the Small Business Administration
on whether to suggest that the provision of law restricting the
consideration of products be modified or removed from law; and (2) that
it will conduct a study in 2003 to assess the potential benefits, costs
and implementation issues associated with selling private label
products through commissaries, and act on the results, as appropriate.
In addition, DeCA officials told us that they agreed with the contents
of the draft report and they also provided some technical corrections
and clarifications to the draft report that we incorporated
as appropriate.
We conducted our review from January 2000 through October 2002 in
accordance with generally accepted government auditing standards.
Details of our scope and methodology are discussed in appendix I.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter. We will then send copies to other
appropriate congressional committees; the Secretary of Defense; the
Director, Defense Commissary Agency; and the Director, Office of
Management and Budget. We will make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please call
me at (202) 512-3841 or Charles Adams at 202-512-8010 or e-mail us at
dyckmanl@gao.gov or adamsc@gao.gov. Key contributors to this report are
listed in appendix VI.
Sincerely yours,
Lawrence J. Dyckman
Director, Natural Resources and the Environment:
Signed by Lawrence J. Dyckman
[End of section]
Appendix I: Objectives, Scope, and Methodology:
To determine the extent to which DeCA requires grocery suppliers to pay
for shelf space in commissaries, and DeCA‘s large suppliers select the
products that are sold by commissaries, we reviewed U.S. Federal Trade
Commission documents and industry studies concerning slotting practices
and category management, reviewed DeCA documents, and interviewed DeCA
and industry officials. More specifically, we reviewed DeCA‘s basic
contract with its suppliers, DeCA‘s performance-based agreements for
fiscal year 2000 and fiscal year 2001, DeCA category management
documentation, and studies and reports about DeCA‘s history,
organization, and operations[Footnote 19]. At DeCA headquarters at Fort
Lee, Virginia, we met with DeCA‘s Director, and interviewed DeCA
officials including among others, DeCA‘s General Counsel, category
management officials, category managers, buyers, and accounting and
contracting officials. We also interviewed several of DeCA suppliers
including large distributors as well as individual companies. We also
visited commissaries located in Texas and Virginia to discuss
commissary operations and the use and management of commissary shelf
space. To determine whether small businesses face barriers in selling
their products in commissaries, we interviewed officials of DeCA‘s
Office of Small and Disadvantaged Business Utilization; reviewed DeCA
correspondence on complains from small businesses; interviewed DeCA‘s
regional officials involved in deciding whether the products of small
businesses would be attractive additions to DeCA selection of regional
and local products, and officials of small businesses supplying DeCA.
We contacted over 50 companies and discussed DeCA‘s use of category
management, slotting fees, and sales of products from small businesses.
In addition, we interviewed officials of the Food Marketing Institute,
several industry trade associations, and the Private Label
Manufacturers Association.
To estimate commissary sales of the products of small businesses and
foreign businesses, we obtained a database from DeCA containing
45,200 products sold through commissaries over the 10-month period
August 2000 through May 2001. For each product, the file contained the
product‘s brand name, a commodity description, unit and dollar sales,
and the Universal Product Code. Also, at our request, DeCA officials
classified each product as being supplied by either a large or a small
business based on its knowledge of its suppliers and the industry. We
drew a random sample of 700 products from DeCA‘s population of
products.[Footnote 20] To assist in verifying the identity of each
company that produced or distributed each product in our sample, we
obtained information from the Uniform Code Council, Inc., that enabled
us to identify the company that obtained a product‘s Universal Product
Code. We then matched DeCA‘s product information with the corresponding
information from the Uniform Code Council database. In some cases, the
matching procedure was unsuccessful, and we used the product brand name
to identify the company that produced or distributed the product. For
the products in our sample, we verified the parent companies, the size
of each company, and identified foreign companies. Our verification of
the number of employees of each company was based on data obtained from
business sources available on the Internet and phone calls we made to
company representatives. We were able to determine the size of the
company[Footnote 21] and its parent company, if any, and whether it was
foreign or domestic for 669 of the 700 products we sampled. The
proportions of small and foreign companies were estimated by
determining the number of products in the sample associated with each
firm and then using the collection of relative frequencies of each
company to estimate the percent of small and foreign companies in the
population. We also used this information to estimate the numbers of
products produced by these companies and sold by commissaries, and the
dollar sales of their products.
[End of section]
Appendix II: Examples of the Terms of DeCA‘s Performance-Based
Agreements:
Agreement number: 1; Length of
agreement: 7 months; Performance of promotion activities: 1. DeCA to
expand bulk sales sections where practical. Space to remain unchanged
where previously expanded. Specific displays to be added in the two
largest store categories for 6-month period; 2. Company will continue
to have a dedicated sales section in stores that excludes others
products; 3. Two other sets of products to be promoted for 3 months
each; Basis for payments to DeCA: Company to pay a specified amount
for achievement of base annual sales volume. In addition, as sales
increase above the base annual volume, company to pay an
increasing percent of additional sales (up to 8 percent) to DeCA.
Agreement
number: 2; Length of
agreement: 1 year; Performance of promotion activities: DeCA to provide
display of specific products at specified commissaries; Basis for
payments to DeCA: Company to make minimum specified quarterly payments.
Above minimum target sales, company to increase total payments based on
pounds of product sold.
Agreement
number: 3; Length of
agreement: 16 months; Performance of promotion activities: Company to
place freezers in specified number of commissaries for display of
company products; Basis for payments to DeCA: Company to make
specified payment at end of performance period.
Agreement
number: 4; Length of
agreement: 1 year; Performance of promotion activities: DeCA to promote
and display specified products on various timetables such as once per
quarter, and two times over one year period; Basis for payments to
DeCA: Company to pay specified amount for each primary display plus a
bonus based on percent of invoiced dollar sales, with the percent
increasing at specified sales amounts.
Agreement
number: 5; Length of
agreement: 1 year; Performance of promotion activities: 4. Off shelf
displays to occur in each of 24 display periods. DeCA to allocate space
for company to build and maintain displays. Only company brands to be
placed on company display equipment; 5. DeCA to provide a minimum of 1
endcap or shop-around display in specified stores. In other specified
stores, DeCA to provide a table, rack, or other display space for
company use; 6. DeCA to promote two specific brand products; 7.
Competitors to have ’proper allocation“ of shelf space. Company shelf
space to be based on sales volume and agreed formula; Basis for
payments to DeCA: * Company to pay specified quarterly cash payment;
Company to provide various promotions of a specified value in
coordination with DeCA‘s category manager.
Agreement
number: 6; Length of
agreement: 1 year; Performance of promotion activities: DeCA to execute
specified number of primaries/power buys in various product
categories; Basis for payments to DeCA: Company to make specified
payments to DeCA per agreement based on performance. Also, incentive
payments added when sales reach or exceed 105 percent of base.
Agreement
number: 7; Length of
agreement: 1 year; Performance of promotion activities: 8. DeCA to
allow racks for display of company products. Rack types specified in
agreement; 9. Specific products to be displayed in off the shelf
locations a specified number of times per year; Basis for payments to
DeCA: Company to pay a specified amount per rack.
Agreement
number: 8; Length of
agreement: 1 year; Performance of promotion activities: DeCA to use
company display rack at all commissaries for company product; DeCA to
follow company specified annual promotion plan; Basis for payments to
DeCA: Company to make specified payments to DeCA for each rack placed
in use.
Source: GAO‘s analysis of DeCA‘s performance based agreements.
[End of table]
[End of section]
Appendix III: Steps in DeCA‘s Category Management Process:
The basic steps in DeCA‘s category management reviews, based on
GAO‘s analysis of DeCA documents and interviews with DeCA officials,
are as follows:
1. DeCA announces a category review including the goals of the review,
and invites companies supplying products to supply information and
analyses of product sales and trends within the category.
2. DeCA conducts individual meetings with interested companies,
including manufacturers, brokers, and broker-distributors, at
Fort Lee, Virginia. DeCA receives information developed by
participating companies and listens to company presentations
and recommendations for the category.
3. DeCA‘s category buyer obtains market information from Information
Resources, Inc., on the performance of products within the category.
This information is gathered from cash register scanner data, and it
shows for each product such data as number of items sold, dollar value
of sales, and changes from prior periods. The data provides a basis for
comparative analyses of sales patterns.
4. DeCA‘s buyer analyzes data provided by Information Resources, Inc.,
along with data and recommendations submitted by participating
companies. Based on the buyer‘s analysis, the buyer prepares a schedule
of its category decisions indicating which products will be added,
which will be retained with or without distribution changes, and which
will be deleted from inventory.
5. DeCA officials develop and sign-off on shelving plans called
’plan-o-grams“ illustrating how nationally distributed products are to
be arranged and that provide shelf space for products that have been
specifically selected to meet regional and local demand. These plans
are used as guides for resetting products on the shelves of individual
commissary stores. Under DeCA‘s supervision and with the participation
of product distributors, brokers, and manufacturers representatives,
products on the shelves of individual commissary stores are
periodically reset based on DeCA‘s display plans.
6. DeCA releases its category review decisions and solicits comments
from companies participating in the category.
6. 0. DeCA responds in writing to each company that objects to DeCA‘s
decisions (an objection to a DeCA decision is termed a ’reclama“), and
usually provides a brief explanation for its decision.
7. After a 90-day period, DeCA removes deleted items from its
stock system.
[End of section]
Appendix IV: Top 20 Private Label Product Categories in the Supermarket
Industry, 2001:
Dollar volume leaders: 1. Milk; Dollar value: $6.4 billion.
Dollar volume leaders: 2. Cheese; Dollar value: 2.3 billion.
Dollar volume leaders: 3. Fresh bread & rolls; Dollar value:
2.1 billion.
Dollar volume leaders: 4. Fresh eggs; Dollar value: 1.6 billion.
Dollar volume leaders: 5. Ice cream/sherbet; Dollar value:
1.0 billion.
Dollar volume leaders: 6. Carbonated beverages; Dollar value:
909 million.
Dollar volume leaders: 7. Juice/Beverages-refrigerated; Dollar value:
714 million.
Dollar volume leaders: 8. Vegetables; Dollar value: 688 million.
Dollar volume leaders: 9. Frozen plain vegetables; Dollar value:
680 million.
Dollar volume leaders: 10. Sugar; Dollar value: 629 million.
Dollar volume leaders: 11. Bottled juices; Dollar value: 573 million.
Dollar volume leaders: 12. Cold cereal; Dollar value: 496 million.
Dollar volume leaders: 13. Cups and plates; Dollar value: 486 million.
Dollar volume leaders: 14. Butter; Dollar value: 484 million.
Dollar volume leaders: 15. Canned/bottled fruit; Dollar value:
446 million.
Dollar volume leaders: 16. Entrée/side dishes; Dollar value:
443 million.
Dollar volume leaders: 17. Food and trash bags; Dollar value:
433 million.
Dollar volume leaders: 18. Luncheon meats; Dollar value: 415 million.
Dollar volume leaders: 19. Breakfast meats; Dollar value: 408 million.
Dollar volume leaders: 20. Cookies; Dollar value: 407 million.
Source: Information Resources, Inc., data as reported by the Private
Label Manufacturers Association.
[End of table]
[End of section]
Appendix V: Comments from the Department of Defense:
UNDER SECRETARY OF DEFENSE 4000 DEFENSE PENTAGON WASHINGTON, D.C.
20301-4000:
PERSONNEL AND READINESS:
DEC 5, 2002:
Mr. Lawrence J. Dyckman:
Director, Natural Resources and the Environment U.S. General Accounting
Office:
Washington, DC 20548:
Dear Mr. Dyckman:
This is the Department of Defense (DoD) response to the GAO Draft
Report, GAO-03-160, ’DEFENSE COMMISSARIES: Additional Small Business
Opportunities Should be Explored,“ dated November 4, 2002 (GAO Code
860028).
The DoD concurs with the overall comments and recommendations in the
report. Specific comments on the recommendations are enclosed.
Thank you for the opportunity to comment on this report.
David S. C. Chu:
Signed by David S. C. Chu
Enclosure: As stated:
GAO DRAFT REPORT - DATED NOVEMBER 4, 2002 GAO CODE 860028/GAO-03-160:
’DEFENSE COMMISSARIES: ADDITIONAL SMALL BUSINESS OPPORTUNITIES SHOULD
BE EXPLORED“:
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
consult with the Administrator, U.S. Small Business Administration on
the provision of law restricting the Defense Commissary Agency‘s (DeCA)
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.
(p. 16/GAO Draft Report):
DOD RESPONSE: Concur. The Department will consult with the Small
Business Administration on whether to suggest to the 108TH Congress
that the provision be modified or removed from the law.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
perform a study to examine the benefits, costs, and implementation
issues associated with the sale of private label products through
commissaries, and act on study results, as appropriate. (p. 16/GAO
Draft Report):
DOD RESPONSE: Concur. The Department will conduct a study in 2003 to
assess the potential benefits, costs and implementation issues
associated with selling private label products through commissaries,
and act on study results, as appropriate.
ENCLOSURE:
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Charles M. Adams, (202) 512-8010:
Acknowledgments:
In addition to the name above, Nancy Crothers, Robert Crystal, James
Dishmon, Curtis Groves, Frank Papineau, and Sidney Schwartz made key
contributions to this report.
FOOTNOTES
[1] Exceptions, among others, include breakfast cereal manufacturing,
fats and oils refining and blending, and specialty canning--1,000
employees or fewer; and cookie and cracker manufacturing, and cane
sugar refining--750 employees or fewer.
[2] 10 U.S.C. 2304(c)(5).
[3] Although not required, DOD sets a goal for the portion of DeCA
resale dollars that small business suppliers are to receive--based on
the companies with DeCA resale agreements. These companies include
brokers and distributors (who represent multiple manufacturing
companies both large and small) and the individual manufacturers who
deal directly with DeCA. For fiscal year 2002, DeCA‘s goal was that
14.5 percent of sales would be attributable to the resale agreements
with small businesses, and 14.9 percent was achieved.
[4] Federal Trade Commission, Report on the Federal Trade Commission
Workshop on Slotting Allowances and Other Marketing Practices in the
Grocery Industry (Washington, D.C.: Feb. 2001). The report stated that
commission staff prepared it and said ’It does not necessarily reflect
the views of the Commission or any individual Commissioner.“ The
commission‘s workshop report contained little information about the
amounts of the fees and their frequency of use and concluded that much
more information needs to be obtained about slotting practices.
[5] Commercial bribery occurs when an under the table payment to a
retailer‘s purchasing agent for placing a product on a store shelf goes
into the agent‘s pocket.
[6] Federal Trade Commission, Slotting Allowances and the Antitrust
Laws, Testimony of Willard K. Tom, Deputy Director, Bureau of
Competition, before the Committee on the Judiciary, U.S. House of
Representatives (Washington, D.C.: Oct. 20, 1999). In addition, the
Federal Trade Commission staff report indicates that, among other
things, the exclusion of competitors is cause for antitrust concern
only if it impairs the health of the competitive process and that the
exclusion of individual firms is not a competitive concern if the
relevant market as a whole remains competitive. The staff report also
states that this perspective flows from the principle, often repeated
by the Supreme Court, that antitrust laws are intended to protect
’competition“ rather than ’competitors.“
[7] Department of Defense, Procurement Management Review: Defense
Commissary Agency (Washington, D.C.: Nov. 10, 1998).
[8] National Defense Authorization Act for fiscal year 2002.
[9] Information Resources, Inc., is a leading source of statistical
data on supermarkets and their products. It purchases point of sale
data for analysis from industry retailers.
[10] We identified the parent company, if any, for 669 of the products
we sampled. Some 138 small companies, 164 large companies, and 40
foreign companies supplied these 669 products.
[11] The 1997 data is from the U.S. Census Bureau‘s 1997 Economic
Census: Manufacturing Subject Series, the latest economic census
performed (Washington, D.C.: 1997). The next economic census of U.S.
businesses is being conducted by the Census Bureau starting in January
2002 and will be reported starting in 2004.
[12] 10 U.S.C. 2486 (e).
[13] Committee on National Security, House of Representatives, House
Report 105-132, National Defense Authorization Act for Fiscal Year 1998
(Washington D.C.: June 16, 1997).
[14] Private-label products are goods produced by a manufacturer under
contract with a retailer, which distributes them exclusively under its
own label. Also known as house brands, private-label products let a
supermarket offer products that can only be found in its stores.
[15] Some large companies that produce name brand products also produce
private-label products to use excess capacity in their plants.
[16] Information Resources, Inc., as reported by the Private Label
Manufacturers Association for 2001.
[17] Standard and Poor‘s, Supermarkets and Drugstores (New York, N.Y.:
Aug. 2001).
[18] Analyses of the financial issues and alternatives for implementing
a private label concept were not included.
[19] For example, we reviewed reports pertinent to DeCA operations,
relationships with its suppliers, and operations including: SRA
International et al., Category Management Survey Final Report,
(Arlington, Va.: May 7, 1997) prepared for DeCA‘s Marketing Business
Unit; and the Jones Commission, Office of the Assistant Secretary of
Defense, DOD Study of the Military Commissary System, (Washington,
D.C.: Dec. 18, 1989).
[20] Because we followed a probability procedure based on random
selections, we are 95 percent confident that the confidence intervals
in this report include the true values in the population.
All percentages we derived have confidence intervals that extend no
more than 10 percentage points away from estimates, as do our numeric
estimates, unless otherwise noted. We used a resampling technique to
derive the 95 percent confidence intervals around the estimated
proportions of small and foreign parent companies. To do this, we
generated 1,000 repeated samples (resamples) of the same size as the
original sample (669), each time selecting products with replacement
from our original sample of products. The proportion of small and
foreign parent companies was calculated for each resample, generating a
distribution of 1,000 resampled percentages. We computed the 2.5% and
97.5% percentile points of this distribution and used them as the
endpoints of our 95% confidence interval. Estimates and associated
confidence intervals for (1) the proportion of products from small and
foreign parent companies, (2) the total number of products from these
companies, and 3) the percent and total sales dollars of products sold
were derived using standard statistical estimation procedures.
[21] Our classification of the size of companies was based on
information from the U.S. Small Business Administration.
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General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.
20548:
