Commissary suppliers irate over DeCA price demands
By TOM PHILPOTT | Special to Stars and Stripes | Published: November 20, 2016
Product buyers for the Defense Commissary Agency (DeCA) are becoming very unpopular with many grocery suppliers.
The buyers are confronting them with canned scripts written by retail experts at Boston Consulting Group and more precise price data on the products they’ve sold to commercial grocers than DeCA has had before.
This is allowing buyers to identify “performance gaps” of manufacturers or brokers by comparing prices they’ve given DeCA to even lower prices they’ve given to some commercial stores, at least at some point over the past year.
The tense “negotiation” begins when a supplier is told to contact a DeCA product category manager, either in person or by phone. One broker who did so said he was told an analysis of price scan data showed DeCA paid roughly $50,000 too much to stock a single food item over the past year.
To make amends, the buyer explained, the broker could write a check for the shortfall or begin to discount the product immediately, and deeply enough so DeCA realizes $50,000 in cost savings over the next 12 months.
Otherwise the product would lose shelf space and might be deleted.
“They are using this ploy to make up the shortfall in what’s planned for DeCA’s appropriation the next several years,” the broker says. They [are] putting pressure on the manufacturer [and] not taking into consideration the [higher] fixed costs of getting the product [to commissaries], the cost of labor we have to absorb [stocking shelves] and so on. There’s something in my guts that says this is absolutely wrong. … It’s price fixing and damn close to extortion!”
William E. Sherman, general counsel of DeCA, said no, it’s legal. When trade magazine Exchange & Commissary News wrote a biting editorial on price negotiations now underway, Sherman responded with a letter.
“While the recent implementation of sharper negotiating tactics may be off putting to some of our business partners,” Sherman wrote, “it certainly doesn’t amount to illegality.”
The letter makes clear DeCA’s new businesslike approach to store operations includes a willingness to trade insults with its harshest critics.
“The supplier outcry … is hardly surprising,” Sherman wrote. “For many years, suppliers have reveled in their negotiating power over us. They benefitted from the comfortable knowledge that DeCA had a legitimate requirement to provide brand name items to patrons around the world without regard for profit. To say that some suppliers feel blindsided because they received no hint or warning that such an audit was in the works calls into question where these suppliers have been for the past several years.”
Congress first inserted commissary “reform” language in last year’s defense authorization bill, allowing for tests of variable pricing and private label brands at select stores. The fiscal 2017 defense bill moving toward final passage drops the notion of tests, at the urging of Department of Defense officials, and gives DeCA full authority to turn commissaries from a benefit to a business.
The law as amended will assure shoppers that their price discounts are to be preserved with no drop in the quality of products. That still allows for a lot of changes, including to brand assortment, that shoppers might not like.
For example, DeCA hasn’t yet calculated the “baseline” of savings that Congress promises to protect. DeCA claimed for years average savings of 30 percent nationwide over the private-sector prices. A BCG study last year said it was closer to 17 percent. So far, DeCA only has said the savings to be protected will be calculated by region rather than as a national average.
Also, DeCA no longer will calculate savings based on name brand product price comparisons alone. A key purpose of current price negotiations is to cut down on brand names to make space for private labels. DeCA expects to use private labels to gain deeper discounts, and apply most of the higher markup this allows to cutting DeCA’s appropriation for taxpayers.
In response to our column two weeks ago, on the “sweetheart deal” BCG got to help DeCA squeeze manufacturers for better prices and winnow its item assortment, DeCA Director Joseph H. Jeu sent us a letter explaining that the price negotiations are key to “commissary business transformation.”
“Historically, DeCA has carried a manufacturer’s complete or recommended assortment of goods, at prices set by the manufacturer. This has resulted in DeCA carrying significantly more brands and items than commercial retailers.” The “over-assortment leads to inefficiencies in sourcing and stocking [and] to insufficient shelf space for high demand, fast moving items, causing those high demand items to be out of stock.
DeCA expects manufacturers to make a reasonable profit, Jeu added. “However, while some manufacturers have honored their obligation to offer DeCA the lowest possible cost, others appear to be charging DeCA a higher net price than they charge the private sector. Our customers let us know when that happens by shopping elsewhere for these products.”
Patrick B. Nixon, president of American Logistics Association, which represents suppliers to commissaries and exchanges, cautioned “government officials” against saying suppliers aren’t giving DeCA their best price.
“There are price warranties in all manufacturer contracts with DeCA whereby suppliers certify they are giving the best price considering all factors. … Every supplier has a different mix of promotions, coupons, product movement [costs], distributor and broker arrangements [that] go into their price. But we’re confident that most, if not all, are giving the government the best price considering all factors. If the government thinks that there is price gouging, they should say so. Otherwise they should not imply that suppliers aren’t living up to these binding agreements,” Nixon said.
The intent of variable pricing and private label brands is to apply dollars saved from deeper discounts on thousands of products to reducing DeCA’s $1.3 billion annual appropriation. Apart from a narrowing of brand selection, the impact of DeCA generating profits should be invisible to shoppers. They shouldn’t be harmed but they won’t benefit either. And what will be the longer-term impact?
More on this will be covered in future columns with reaction from advocates for military shoppers, analysis from other commissary experts and a fuller explanation from DeCA on its arrangement with BCG, including its response to a new claim from supplier sources that BCG get 71 percent of savings realized from price negotiations, at least the first year. This would be atop no-bid, fixed-price contracts worth perhaps $40 million.
The broker who shared his story here represents hundred of products sold in commissaries. He refused to grant permission to use his name or to identify the product subject to the BCG price squeeze for fear of “a backlash.”