The U.S. Navy Exchange—Loss Prevention with a Family Touch, Global Reach

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Here is a quick quiz—Name a multi-billion-dollar global retailer that is consistently profitable, has had only one owner in 200 years, offers attractive wages and benefits (medical/dental/life insurance/401K plan), and whose longest serving employees are reluctant to retire despite an attractive retirement package?

The answer is the Navy Exchange System. Technically, the Navy Exchange Service Command (NEXCOM), under its parent command, the Navy Supply Systems Command (NAVSUP), is a component of the U.S. Navy.

Military names and acronyms aside, the Navy Exchange is a remarkable “invention” of military necessity, cutting-edge retail merchandising, and remarkably enduring “support the troops” enthusiasm. The scope and scale of the Navy Exchange apparatus easily make it a global retailer with clout. Its operations, from purchasing to distribution to merchandising to loss prevention, are in many respects standard, often best-in-class, in the retail industry. But the Navy Exchange’s unique business model, operational infrastructure, and organizational culture make it an intriguing object of study.From a loss prevention perspective, particularly, the Navy Exchange is a tightly calibrated, technology-driven operation…and a best-kept secret in loss prevention circles. “I am often struck by how relatively few loss prevention professionals know about the Navy Exchange. This is especially the case with female LP professionals who I meet through the NRF’s Women in LP caucus,” says Susan Stutzman-Box, director of loss prevention, safety, and claims for the Navy Exchange. “It is personally exciting and challenging to talk to them about loss prevention in such a unique environment”

Global Enterprise

The Navy Exchange’s mission is to provide authorized customers quality goods and services at a savings as well as support Navy quality-of-life programs. Customers save an average of 22 percent over regular prices at conventional retail establishments.

The universe of authorized customers is strictly defined, but substantial. There are currently 2.6 million “eligible shoppers,” including active-duty personnel, reservists, and retirees, as well as their immediate families, from all branches of the United States military. In the states about 50 percent of the customers are armed forces retirees. The other 50 percent are active military and their families. Overseas, almost 100 percent are active military and their families

To fulfill this enormous mandate, the Navy Exchange has evolved over its 200-year history (see sidebar page 48) to become a sophisticated, global retail enterprise. There are 104 Navy Exchange complexes and nearly 300 Navy Exchange stores in the United States and twelve other countries. Based in Virginia Beach, Virginia, it has 14,000 civilian employees, about 27 percent of whom are Navy family members, and only about a dozen of whom are active-duty Navy

It is difficult to compare the Navy Exchange’s global retail operations and business model with conventional retailers. The Navy Exchange model is a unique hybrid, offering its customers all of the products and services that civilians find at typical discount mass retailers, such as Walmart or Target; full-line department stores, such as Macy’s or Sears; focused discounters, like Home Depot or Best Buy; and convenience stores, such as 7-11 or WAWA.

The Navy Exchange’s retail and service operations include the following formats.

Navy Exchanges. At 104 multiservice complexes and nearly 300 stores, Navy Exchanges offer full retail lines, from garden supplies to electronics to high-end designer label jewelry and fashion. For customers, the most compelling appeal to shopping at Navy Exchanges is the savings. In addition to lower prices, no state sales taxes are charged.

At most sites there are also numerous services, including gas stations, auto repair centers, liquor stores, barber and beauty shops, florists, optical stores, laundry and dry cleaning, and fast food restaurants. These are either Navy Exchange owned or private-public ventures with companies such as Taco Bell and McDonald’s. The stores vary in size and sales volume. The largest Navy Exchange, Pearl Harbor, is 230,000 square feet, and the smallest, in Sugar Grove, West Virginia, is about 4,100 square feet. Store sales volumes range from $232 million to $200,000.

Ship’s Stores. From the earliest days of barebones ship “canteens,” today crew members aboard Navy vessels shop at 157 Navy ship stores and Military Sealift Command stores. These offer “quality-of-life” products and services, include vending machines, barber shops, and laundry services. On U.S. Navy ships with a crew size over 100, the norm is to have a single ship’s store to serve the crew. On larger ships, such as carriers, there may be up to three different stores.

Navy Lodges. There are forty-one extended-stay facilities around the world, offering over 3,100 rooms, that provide Navy and other armed-forces members and their families lodging at rates 40 percent lower than similar private-sector facilities. The lodges are used as temporary housing for personnel and their families who are relocating because of new assignments. The lodges are also popular with active-duty personnel on vacation leave.

Uniforms. At 104 uniform shops and an on-line shopping site, the Navy Exchange provides uniforms for Navy and Marine Corps active-duty members. It also runs a Navy Clothing and Textile Research Facility in Natick, Massachusetts, which conducts testing and evaluation of all uniforms and protective clothing.

Telecommunications. The Navy Exchange handles all unofficial personal telecommunications services for Navy personnel and their families, including pay phones, calling cards, prepaid cards, long-distance service, cellular service, voice mail, Internet service, port calls, and shipboard phones that allow sailors to call home while at sea.

Command and Control—The Bottom Line

While part of the U.S. Navy command structure, the Navy Exchange is financially a self-funding enterprise. For fiscal year 2009, sales were over $2.5 billion and net profit was about three percent. Of that net profit, 30 percent is reinvested into the refurbishment, replacement, or expansion of Navy Exchange facilities and information technology. The remaining 70 percent, over $50 million last year, is “contributed” to the Navy Morale, Welfare, and Recreation (MWR) program. The MWR program funds a sprawling array of quality-of-life services and programs, such as athletic facilities, child care, continuing-education programs, and base movie theaters.

The Navy Exchange’s unique mission of both providing products and services at attractive prices and contributing to the quality of life of the military and their families makes for an intriguing blend of basic retail expertise and military command and control.

Fritz Hirchert, a civilian, is NEXCOM’s vice president of loss prevention and safety. Hirchert and his peers, the senior executives for store operations, merchandise, human resources, facilities, and contracts, report to the executive vice president and chief operating officer, who is also a civilian.

“I report to the command itself. The command includes a triumvirate, if you will. One is the Navy Exchange’s Navy commander, who is a rear admiral. One is a captain, who is the deputy commander of military services, and one is the chief operating officer, who is a civilian and the person I report to on a daily basis,” Hirchert says.

Hirchert points out that the Navy Exchange’s senior civilian executives all have extensive public-sector retail backgrounds, but that the rear admiral and captain are long-time Navy Supply Corps officers with extensive knowledge of the global operations of Navy supply and logistics.

Shrink and Loss Prevention at the Navy Exchange

The Navy’s Exchange’s loss prevention organization and its operational architecture are not dissimilar from that of other global, multiline retailers. Of course, it helps matters of security and theft prevention that all Navy Exchange sites are located on federally owned property, either behind walls on Navy bases or just outside the walls.

However, Hirchert makes it clear that shrink is a business issue that the Navy Exchange takes seriously and that it invests in a comprehensive, robust loss prevention program. “We have about 325 full-time equivalent positions. We have a headquarters core group and a field organization that supports the ten operations districts,” Hirchert explains.

“The headquarters team works with the field on loss prevention, safety, and compliance. We have specialists in investigations, training and awareness, information systems, audit, policy and procedures, and career development. Our responsibility also includes claims and risk management, including workers’ compensation, general liability, property claims, and insurance”

Both Hirchert and Stutzman-Box believe that having loss prevention, safety, and risk management in the same department creates a tightly integrated, turnkey-type operation that provides economies of scale and minimizes losses. Hirchert says that when he joined the Navy Exchange fifteen years ago, there was essentially no headquarters staff and not much centralized, standardized loss prevention. His challenge has been to build a small headquarters staff that could broaden and deepen loss prevention, safety, and risk management processes across the Navy Exchange global operation.

Shrink at the Navy Exchange is significantly lower than at most traditional retail chains. Hirchert says that when he arrived, annual shrink averaged between 1.5 to 1.75 percent of sales. It has been under 1 percent for the last eight years, and less than .5 percent for the past two years.

There are clearly cultural factors that would tend to work against big shrink. “We are the Navy family and that definitely makes a difference, particularly in shoplifting,” Hirchert says. “People who are active-duty military and apprehended for shoplifting risk prosecution and dishonorable discharge. Dependents risk losing their Navy Exchange shopping privileges for up to a year. If they are deployed overseas and can not shop at the base’s exchange, they will spend much more buying necessities on the local market.”

For a similar reason, internal theft is consistently low. “It makes a difference that about 30 percent of all Navy Exchange employees are dependents of active-duty personnel. There is a strong sense of “family store,” according to Hirchert. Nonetheless, shoplifting and internal theft do occur. “Although the majority of incidents involve civilian customers, 15 to 20 percent of incidents involve active-duty personnel from across the ranks.”

Hirchert and Stutzman-Box do not see organized retail crime (ORC) as a current active threat because of the stores’ locations on Navy bases and rigorous identification requirements for customers. “Having said that, we are looking at the ORC threat and conducting research into any vulnerabilities,” Stutzman-Box notes.

Data-Driven, On-line Global LP

Hirchert often says that effective loss prevention is not rocket science. “Successful loss prevention in any and all retail environments comes from taking care of the basics, day in, day out, including physical security, locks, keys, alarms, CCTV, point-of-sale (POS) exception reporting, et cetera. For all large, multisite, multiservice organizations, standardized policies and procedures and compliance are critical,” he says. But while “taking care of the basics” may require old-fashioned discipline and persistence, at the Navy Exchange it also takes a hefty investment in information technology

Navy Exchange loss prevention and safety increasingly operates on-line, using an expansive, secure intranet site for providing communication and coordination; a repository of content, from policies and procedures to training materials; as well as on-line monitoring of software and electronic systems installed in the field.

For example, the on-line case management system enables the headquarters staff to review and track internal and external theft and safety incidents on a worldwide basis. The incident-tracking functionality includes automated civil recovery and restitution, and it allows store and headquarters loss prevention/safety managers to track the investigation and resolution of cases using a single standardized report. This has meant the elimination of numerous local forms and reports.

The Navy Exchange also utilizes a POS exception-reporting system so that illegal or variant register transactions can be reviewed at a store and district level as well as at the command’s headquarters in Virginia Beach. CCTV and electronic article surveillance is also integrated into the environment, with tagging used on high-theft items valued over fifty dollars.

Challenges and Opportunities with the Navy Exchange

Both Hirchert and Stutzman-Box are quick to point out that from a number of perspectives, the Navy Exchange offers unique challenges and opportunities for loss prevention professionals. First, there is basic quality of life. Working at a Navy Exchange store in Hawaii, Italy, or Spain can not be entirely unpleasant

“For a recent college graduate starting out in loss prevention, the Navy Exchange offers unusually rich potential for career development, variety of experience, and travel,” Stutzman-Box says. “For new hires with no loss prevention experience at all, we have the typical industry career progression—starting out as an investigative assistant, becoming a certified investigator, and progressing through store, district, and headquarters assignments.”

Over the course of a Navy Exchange career, there are numerous opportunities for assignment to other countries. “Our loss prevention associates who take foreign assignments talk about the excitement of introducing their families to different cultural environments. Their kids attend the excellent Department of Defense base schools. They can enjoy all of the quality-of-life programs that the Navy Exchange helps to fund,” Stutzman-Box says

It also appears that there is no such thing as “vanilla” retail loss prevention at the Navy Exchange. “Every day is different here at headquarters and, most definitely, in the field. One day you can be working with the merchandising department on issues relating to displays of new high-end women’s fashion, and spend the next day on safety and security issues at the fast food restaurant or gas station or Navy Lodge at your site.”

Diversity is also important for the Navy Exchange. Today, the loss prevention and safety team is about 55 to 45 percent male-female. Hirchert says that ethnic diversity is at or better than national rates for U.S. retailers. The Navy Exchange loss prevention organization is also diverse in terms of background and age. “We bring in very qualified professionals and executives. We have been fortunate to hire former vice presidents and directors from other retailers for key positions.

“On the other hand, we are really proud that we have loss prevention associates who started with Navy Exchange twenty or thirty years ago as security guards or sales associates,” he adds. “The Navy Exchange has no mandatory retirement age. Even though there is an excellent retirement program, plus lifetime shopping at the Navy Exchange anywhere in the world, people like working here and do not want to leave.”

MICHAEL A. STUGRIN, Ph.D., is a business writer and communications consultant based in Long Beach, California. He can be reached at mstugrin@earthlink.net.

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