The PX enlists the services of the web to extend its already wide reach
By Karen M. Kroll
They aren’t the sexiest merchants in America and in fact they probably don’t register much of a blip on most consumers’ shopping radar. But at $7.6 billion in annual revenue they are bigger than Nordstrom. And now they’re coming on strong with a web site that has already extended their reach beyond their core market.
They are the Post Exchanges—PXs to military personnel. They offer great prices on all kinds of merchandise. And to buy from one, a consumer must be military, retired military, National Guard or a family member. They have a strong enough following—based primarily on hugely attractive discount prices—that many ex-military folks who live near bases shop in the PXs regularly.
Now, no longer do veterans have to live near a base to take advantage of the PXs. For nearly three years, the PXs’ parent organization—the Army and Air Force Exchange Service—has operated a web site. Volume on the site doubled last year over the previous year which itself was more than 220% over the year before.
Barry Gordon, senior vice president, cyber region, with the Dallas-based AAFES, credits the computer-savvy population that makes up the Exchange Service’s target market for the organization’s online success. Servicemen and women tend to be computer literate, as most use computers in their jobs, Gordon says.
In addition, like many other bricks-and-clicks retailers, the Exchange Service has been focused on “capitalizing on convergence,” says Gordon. The organization’s goal is to get customers to shop with them through all channels. “The career military person and enlistee have an affinity with us,” Gordon says. “Trust is a major factor we’re trying to capitalize on.”
While undoubtedly a major retailer, the PX system competes mainly with local merchants for shoppers’ dollars. The big discount chains don’t consider the PXs to be in the same league, but small merchants near military bases keep a close eye on prices and activities at the local PX. Having a web site could make PXs more of a factor to nationwide retailers, who might have to start watching the PXs more closely. But the PXs’ customer base is still small enough that competitors may not feel the impact for some time.
Double time
Nearly 5 million PX customers live within 40 miles of a PX. There are 7.5 million authorized PX customers worldwide. Of the 7.5 million, 29% are on active duty, 31% are in the National Guard or reserve and 40% are retirees.
The Exchange Service already sells about $90 million through its catalog/Internet channel and Gordon expects that number could increase to as much as $200 million as soon as 2003. The service’s goal is to rank in the top 40 web stores within two years. With present volume, PX.com ranks in mid 50s, based on the National Retail Federation’s ranking of Internet retailers. The PX ranks among the 40 largest retailers overall and in the top dozen of mass discount retailers.
The Exchange Service’s mission always has been to support America’s service men and women by providing merchandise and services at reasonable prices. Today’s organization, however, bears little resemblance to its predecessors. These were the sutlers, or entrepreneurs that followed the U.S. cavalry, setting up shops where soldiers could buy provisions. In 1895, the War Department ordered post commanders to establish an exchange at every post.
AAFES’ job today is a huge one. A modern Post Exchange offers everything from toiletries and military uniforms to giftware and electronics. Some overseas exchanges sell new cars. What’s more, because the clientele includes new recruits as well as retired generals, the price points vary greatly. For instance, shoppers can find watches ranging from less than $100 up to several thousand.
AAFES’s 18 lines of business covering the globe put it among the largest retailers in the world. It employs 54,000 and operates more than 10,500 facilities, including exchanges, stores, shopping centers, and fast-food outlets. The organization runs one of the world’s largest proprietary credit card operations. “It’s the sleeping giant that no one knows about,” says Rick Berg, senior strategy manager with iXL Inc., a technology consulting firm headquartered in Atlanta.
AAFES is a “non-profit profit-making organization,” Gordon says. About 70% of its earnings help fund Morale, Welfare, and Recreation, programs. These include libraries, sports facilities, child-care centers and other programs on America’s military bases. The remaining net income is used to build new stores and renovate existing ones. In 1998, the Exchange Service distributed $238 million for MWR programs and spent $178 million to improve and build stores.
In 1996, the organization made its move online, driven by chief information officer, Luis Merced.
The PX service benefits from Internet sales by being able to extend its reach and merchandise while avoiding the high costs of expanding in the real world. “Selling online doesn’t reduce any of our current costs,” Gordon says. “Rather, it allows us to offer a much broader selection of merchandise to our customers, who may be stationed remotely and whose local PX cannot justify the stocking of high-ticket or non-essential items.” We are able to substantially increase our offerings with minimal incremental and logistics costs.”
The online operation, along with the AAFES catalog, is service-neutral, Gordon says. That is, military men and women from the Navy, Marine Corps, and Coast Guard, as well as the Army and Air Force, all log on to the same site to shop. The online exchange goes by the generic title of “Exchange Online Shopping.” In contrast, the Navy, Marine Corps and Coast Guard have their own operations to run the exchanges on their bases.
Analysts say that the move to the web made sense. “The PXs offer a lot of savings to the military men and women. If they now can get a way to buy the goods without traveling long distances, it’s a real natural,” says Chris Boring, president of Boulevard Strategies, a Columbus, Ohio-based retail consulting firm.
Who goes there?
The site is largely a homegrown affair, Gordon says. Over about 10 months, employees migrated text and images from the catalog to the Internet. Today, the entire catalog is online, with the exception of products whose manufacturers restrict their sales online.
Microsoft’s NT operating system and e-commerce engine drive the front end. “We had a mail-order business prior to the Internet, and built a front end to it,” says Robert Carreras, AAFES vice president. The hardware hosting the system includes several IBM MIPS and Amdahl mainframes. To verify that a potential shopper is affiliated with the military, the shopper must provide identifying information, including a Social Security number and date of birth.
The AAFES system then electronically compares this information to a military database. “Because we’re part of the Department of Defense, we are permitted limited access to military databases,” Gordon says. Assuming the information checks out, the customer can create a user name and password.
The only outside help AAFES has used are freelance web designers, says Gordon, who won’t disclose the cost of rolling out the site.
To be sure, the site isn’t the glitziest. “For a retail site, it’s not as flashy as some,” says David Taylor, senior vice president of consultants Operon Partners LLC, Stamford, Conn. “The site isn’t technically competitive with the best-of-breed sites. But it’s practical.”
It’s also voluminous. Some 62,000 SKUs are online. The assortment of products offered via the web differs a bit from that found in the AAFES’ major stores and the catalog, Gordon says. “On the Net, items are more trendy,” he says. Giftware items, such as crystal, china and leather goods, are top sellers. Second in popularity are electronic items, including boom boxes, stereos, and digital cameras.
About 20,000 SKUs are exclusive to the Internet, Gordon says. Many are products that didn’t make it into AAFES’ biannual catalog. This year, for instance, scooters have been hot sellers online. In addition, Gordon and his team are using the web site to test acceptance of new products, before they purchase them in enough quantity to stock the AAFES bases. One example: high-end digital cameras first were offered on the web site. They became hot sellers, and subsequently were added to the catalog and stores.
In addition, the Exchange Service uses the Internet for clearance items. In fact, the closeout portion of the site is one of the most popular areas. In some cases, the service has consolidated small inventories from a number of sites as a way to boost exposure for those items.
Beyond K rations
Prices are nearly identical between the online and real-world outlets, Gordon says. The exception may occur when a local manager with an overstock marks down a particular item. To maintain price parity, the AAFES online store doesn’t charge for shipping and handling for the items that it warehouses. However, AAFES also offers products from concessionaires, or vendors that hook through the AAFES web site and then move customers to their own sites. Shoppers on those sites are liable for any shipping and handling fees.
Another benefit for online shoppers: those that hold AAFES’ proprietary credit card can view their statements and make payments online.
AAFES legally can advertise only to its authorized customer base. It prints the PX URL on receipts and on shopping bags. The service produces 500,000 to 1 million promotional tabloids a week that it distributes in stores and by mail. It also publishes two catalogs a year of up to 600 pages each. Circulation on those catalogs is 450,000. And it publishes five special holiday-related supplements to the catalog each year. Those supplements go to 150,000 customers. All promote online shopping as well as catalog buying.
The promotions appear to be hitting the mark. About 35% of shoppers who buy the Internet Items of the Week featured in the tabloids have not previously purchased online or through the catalog, Gordon says. “We haven’t seen any cannibalization. Our brick-and-mortar stores have shown no decline.” The only reasonable conclusion, says Gordon, is that AAFES is taking sales from other Internet retailers. How significant that share movement might be is unknown because the sales are so small.
Self-service
While AAFES may have a natural target market, it still is vulnerable to competition. Gordon and his team keep their eyes on the national discount chains, such as Kmart Corp., Wal-Mart Stores Inc., and Target Corp., as well as the big-box retailers, like Best Buy. At every installation in the U.S., AAFES shoppers monitor the local competition. “Our mission in life is to provide goods and services to the military at a good price,” Gordon says.
That philosophy extends to the online marketplace, as well. AAFES analysts monitor prices offered by other online merchants. They also check out e-commerce trends and site features. Such attention to the competition makes sense, says iXL’s Berg, given the limited universe of customers from which AAFES can draw. “If they upset them, they don’t have another group of people they can go after,” he says.
Not every e-commerce initiative has been an unqualified success. AAFES deployed 17 kiosks in its retail locations in mid-1999. These allow service people who don’t have a computer to order online from within in the stores. Results so far have been mixed, Gordon says. “Customers don’t appear to be inclined to do that kind of shopping in a public place,” he says.
However, his team is trying to determine if some changes, which Gordon will not enumerate, will enhance results, and will test 15 new installations this summer.
The challenges notwithstanding, AAFES’ online business appears to be hitting the mark. Internet sales now nearly equal the catalog. By year-end 2001, online sales should eclipse the catalog, Gordon says.
The success of AAFES’ online efforts in dollars and cents is just part of the story. The mission of the organization, in both the real and virtual worlds, is to support America’s soldiers, and give them access to the goods and services that many people take for granted. The Internet is an effective way of meeting this goal. “We serve customers in over 25 nations. Some are convenient to PXs, and some are stationed remotely, such as in the Balkans or Greenland,” Gordon says. “We’re very proud to say that we’re wherever they are in the world.”
Karen Kroll is a Minnesota-based freelance business writer. 
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