Competing in a Sea of Change

Despite the sinking economy, the Navy Exchange Service Command is sailing in relatively calm waters these days. It has experienced positive sales in recent months, suggesting it will surpass the $2.5 billion in revenue it posted for the fiscal year that ended Feb. 2.

“Our 2007 audited sales were over plan by 0.8%,” stated Rear Admiral Robert J. Bianchi, Commander, Navy Exchange Service Command (NEXCOM). “Audited operating profit was $57 million and audited net profit was $48 million, which included a $9 million, one-time expense mandated by the Department of Defense for eligible associates working overseas.”

Established in 1946, NEXCOM operates more than 100 NEX complexes including 305 retail locations as well as approximately 155 stores based on Navy ships. Additionally, NEXCOM has more than 1,200 service operations including gas stations, food outlets, barber shops and salons, and laundry/dry cleaners. With stores in Europe, Asia, Africa, Cuba, the Middle East and the Pacific Rim, few retailers can compare to NEXCOM’s global presence.

A true multichannel player, NEXCOM sells Navy uniforms at bricks-and-mortar stores as well as via its direct-to-consumer channels, including the NEX Web store and the Uniform Support Center (USC), where uniforms are ordered via a toll-free number. In 2007, more than 20% of total uniform sales were generated by the Web store and USC. Nearly 80% of uniform sales, roughly $78 million, were produced at the 128 NEX uniform centers.

In addition to the retail components operated by NEX, there is also a hospitality division that operates 43 Navy Lodges. Worldwide, NEXCOM employs approximately 15,000 associates.

In an interview with senior editor Connie Robbins Gentry, Rear Admiral Robert J. Bianchi discussed how NEXCOM has ridden the waves of the turbulent retail industry.

Has the economy impacted your shoppers? 

The increased cost of gasoline has definitely changed the shopping behavior of our customers. We’ve reacted to this like any other retailer and have validated our relevance in how we advertise, price and market our merchandise. We are seeing positive traction these last few months with increased transactions over last year. Our overseas stores have continually done very well, performing above company average.

Tell us about your bricks-and-mortar stores and your ship stores. 

Navy Exchange stores are split into multiple segments. We have full-line main stores, convenience stores, specialty stores and category-killer stores. Our main stores average 70,000 sq. ft.

The Ship’s Stores program is a separate component of the NEXCOM enterprise unlike that of typical retail stores. These stores are a quality-of-life benefit onboard a warship that exists solely to support the crew members. The products, hours of operation and footprint vary greatly depending on the size or platform of the ship—for example, an aircraft carrier vs. a frigate. Stores can range from 96 sq. ft to 600 sq. ft., and a typical store on a small ship may carry about 400 SKUs while a larger store will have approximately 1,200 SKUs, depending on the length of deployment and the ship’s mission. Store hours during a deployment can range from 40 hours per week to 24 hours per day, depending on the needs of the crew, and a typical ship’s store has one to two cash registers.

Would you elaborate on differences in your retail channels? 

We offer four primary retail channels for our customers: the bricks-and-mortar store environment; a Uniform Web-based online store; in-store special order; and an Exchange Catalog program, which we collaborate with the Army & Air Force Exchange System (AAFES).

Our online Uniform store, which offers up to 14,000 SKUs, represents 22% of our uniform sales and services to all of our customers throughout the world, including APO/FPO addresses. The SKU count in our bricks-and-mortar stores is dependent on space and the installation’s mission. Our largest bricks-and-mortar store, in Pearl Harbor, Hawaii, has 144,000 sq. ft. of selling space, stocks up to 100,000 SKUs and generates over $1,200 per square foot. However, the typical Tier 1 store carries up to 75,000 SKUs. We are actively pursuing a cross-channel strategy which will give us the ability to extend our brand and services on the Web.

Are there challenges that may be unique to NEXCOM? For instance, if the population of “active” service people is declining, how do you continue to drive sales growth while maintaining low prices and serving a smaller market? 

As our active-duty population stabilizes, our focus is to provide an assortment that motivates our customers to shop at the NEX for all their needs. The merchandise team is focused on providing relevant merchandise and our Navy Exchange stores are a one-stop-shopping destination. There isn’t a retailer out there that can offer [this selection of] quality-branded merchandise at a savings under one roof. Some of our customers have said it best: “Where else could I buy a Coach handbag, pick up my laundry, buy all of my household-cleaning needs and fill my gas tank?”

However, one of our unique challenges is the inability to advertise merchandise and prices using traditional media. The NEX can only advertise prices and merchandise to its authorized patrons, thus restricting media channels to direct mail, military-associated publications, Web sites and military TV outlets.

While our “universe” of eligible customers is primarily geared toward the uniformed member and their families, we are keenly sensitive to the environment they are exposed to—serving on sea or overseas assignments throughout all corners of the globe [coupled with] the never-ending change of reassignments every two to three years that comes with being in the military. Following the consumer as they travel the world presents a unique retail challenge for us. Certainly, expanding our brand presence on the Internet will allow us to be in a better position to [serve] our customers.

How much of an impact do commercial retailers such as a Wal-Mart Supercenter have on your sales? 

The retail industry continues to operate in a highly competitive environment and we are no less affected by economic trends than our colleagues in the industry. It plays an important part in how we strategize pricing, promotional scheduling, store design, location and merchandise mix. Clearly, U.S. consumers are wrestling with high gas and food prices, a slumping housing market, escalating credit crisis, a declining dollar and a weakening job market. These fiscal challenges are no different for our military patrons. We are committed to providing a strong savings experience for our shoppers every day while generating revenues that support quality-of-life programs for the Navy family. Our buyers have established strong partnerships with their vendors to offer these types of programs for our customers. Being competitive, relevant and focused on best brands and best buys every day—that is our formula to success.

In addition to the implementation of reusable “green” shopping bags and biodiesel fuels at NEXCOM, what importance is placed on sustainability and how are you creating more sustainable practices? 

NEXCOM’s strategy to help the environment is very much aligned with the Navy’s environmental strategy. Nearly every facet of the Navy Exchange System is involved in conserving natural resources. It’s something we’ve been practicing for the past several years.

One example of this is the energy-efficient vending-machine technology that we installed to help lower energy costs by powering down a vending machine when the surrounding area is unoccupied and automatically re-powering the vending machine when the area is reoccupied. The technology is designed to be installed