Deploying Retail to Support Our Troops 

Michael P. Howard COO, Army & Air Force Exchange Service

In the 39 years Michael Howard has been with the Army & Air Force Exchange Service (the Exchange), he has traveled the world and proudly held leadership roles in one of the nation’s oldest and most far-flung retail organizations. Now in its 116th year of operation, the Exchange is responsible for some 3,024 facilities worldwide, including sites that serve troops deployed in combat locations or the most remote areas.

From a humble start as a part-time custodial worker at Lowry AFB Exchange in Colorado, Howard worked throughout college and then joined the organization as a full-time accountant in 1977, becoming VP real estate in 2003, CIO in 2004, then CFO and COO in 2006. As COO, Howard directs overall operations and supervises staff at Exchange sites around the world. Speaking with Chain Store Age contributing editor Connie Gentry, Howard joked, “I can still sweep a mean floor,” as he gave an update on the Exchange.

What initiatives does the Exchange prioritize?
We focus on our customers, associates and operational excellence to improve productivity and reduce costs. Recently we’ve done quite a bit with transportation and logistics.

Increasingly, our customers live outside the military base. In fact, 70% live off the base and drive past other retailers to shop in our stores. We have to provide exceptional service and the right merchandise for each demographic, which varies from newly enlisted recruits, living paycheck to paycheck, to retired officers, with two or three incomes.

Working at the Exchange is different from other retailers because serving the military is personal: 25% of employees have a family member in the military, and 50% have a personal connection to the military. We also exercise preferential hiring to help family members transition quickly to new locations by providing continuity in employment from one Exchange to the next.

How do you make sure the merchandise at each Exchange matches the demographic?
We know the demographics of military bases — active military versus retirees, unmarried soldiers versus young families — and we cluster groups based on shopping habits. We use business analytics to collect customer data at the point of sale so we know the shopping habits of each location and identify purchases by category. From the POS data, we merchandise to each location based on the demographic and the established shopping habits. When there are major moves from one installation to another, the shopping data from the previous installation helps us prepare merchandise plans for the next installation.

Can you elaborate on supply chain improvements?
We’ve increased utilization of our fleet, which has around 500 tractors and 1,800 trailers, and make 85% of all store deliveries, saving about $2,000 per shipment. Our fleet converted to aluminum wheels on tractor trailers, which produced a 5% savings, and installed trailer skirts for better airflow. A recently implemented transportation management system allows us to efficiently utilize backhaul runs from stores to pick up merchandise at vendors and deliver to our DCs, which saved another 15%. Last year we installed a warehouse management system in our West Coast DC that facilitates cross-docking and will yield continued inventory reductions.

In view of the current business climate and global dynamics, does the Exchange receive funds from the government, and if so, are potential budget cuts a concern for your operations?
We are 98% self-supporting — about 2% of our funding comes from the federal government to support active-duty > military positions within AAFES and supplement the cost of shipping goods overseas. Our unique mission is to go wherever troops go and ensure the pricing of goods and services are consistent no matter where our customers are. Even with cuts in the federal budget, I don’t anticipate an impact on the Exchange.

How would a withdrawal of troops from Iraq impact Exchange installations?
When the conflict in Iraq will draw down is a government decision, but as installations in Iraq downsize, those in Afghanistan are building up. Merchandise and people working in our Iraq stores will likely migrate to Afghanistan.

A large percent of Exchange earnings support Morale, Welfare and Recreation programs. Has the recession and economic downturn impacted these donations?
MWR donations are doing very well — over the last 10 years we’ve given $2.4 billion to MWR programs, and in 2010 we donated $248.7 million. In addition to our main Exchange stores, our convenience stores and food operations generate strong profits.

Can you share details about the Exchange’s partnerships with other retail brands?
We have a number of very successful concept shops, including Coach, Pink by Victoria’s Secret, Michael Kors and Affliction clothing. We don’t just mix these brands in with other merchandise; we make a special shop to showcase the brand.

We have 15 Martha Stewart concept shops that offer a 30% to 40% savings for our customers. In hardlines, we have Serta mattress shops and cosmetic beauty bars where popular brands, like Estée Lauder and Clinique, can be changed to fit the demographic. In electronics, we have 20 Apple stores that look just like Apple stores in a mall, and we expect to add 15 to 20 Apple stores next year.

Are there unique aspects to your food service brands?
All the leading fast-food brands are in the Exchange — Burger King, Taco Bell, Pizza Hut — but the interesting thing is how these partners have increased healthy menu choices because people in the military are conscious of staying fit. Even our convenience stores sell salads, wraps and fruits. In fact, we sell 70,000 bananas every week in our convenience stores, which actually sell more bananas than Snickers bars!

Are there other trends you would highlight?
We sell 18 million items online, and over the last year we’ve updated and improved our website to make it an easier experience for customers. Since we increased our focus in this area, we’ve seen a 20% to 30% sales increase in website sales each month. As I mentioned, 70% of our customers live off the military installation. They often shop online, and if a customer pays with our in-house credit card, the shipping is free.

What are the greatest opportunities for the Exchange?
The Internet creates huge opportunities to increase sales and connect with customers. We are tweeting and using Facebook to deliver coupons and incentives to customers. There are also opportunities to use our business analytics tools to gain more insights. By identifying what, when and where product sells, we can better forecast promotions so we send the right quantity of the right product to the right store to avoid missed sales or markdowns.

After 39 years with the Exchange, can you share a favorite memory?
It’s exciting to visit installations and see how associates help and serve those who protect our freedoms. My job is to say thank you, especially to the 300 or 400 associates who volunteer to deploy with the troops. These associates spend six months or a year living in tents or whatever conditions the military is living in, working 16- and 18-hour days, but they all say it is a life-changing, rewarding experience. I’ve seen that too, on the trips I’ve made to Iraq and Afghanistan, but one soldier in Baghdad captured the essence of the Exchange. He said he visited daily because it made him feel like he was at home, not in a war.

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