Army and Air Force Exchange Service

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Army and Air Force Exchange Service

3911 South Walton Walker Boulevard
Dallas, Texas 75236-1598
U.S.A.
Telephone: (214) 312-2011
Toll Free: (800) 527-6790
Fax: (214) 312-3000
Web site: http://www.aafes.com

Government-Owned Company
Incorporated: 1941 as Army Exchange Service
Employees: 54,000
Sales: $6.99 billion (2000)
NAIC: 44512 Convenience Stores; 45211 Department Stores; 72211 Full-Service Restaurants; 722211 Limited-Service Restaurants; 45421 Vending Machine Operators; 512131 Motion Picture Theaters (Except Drive-Ins)

The Army and Air Force Exchange Service (AAFES) is a government agency within the Department of Defense that operates for-profit stores, restaurants, movie theaters, gas stations, and other businesses on military bases and in the field. Income generated by the service is used to pay for morale, welfare, and recreational programs on bases, which promote cultural events and operate and build such facilities as libraries, gymnasiums, and youth centers for military personnel and their families to use. Only two percent of the agency’s funds come from the government; these typically are used to cover transportation costs and wages for a small number of military staffers (the vast majority of AAFES employees are civilians). AAFES stores offer a wide range of products, from food and health-care items to clothing, stereo equipment, and auto parts. Prices are significantly lower than those charged by civilian businesses, and customers pay no sales tax. Through its catalog service, which went on-line in 1996, AAFES customers can order goods from anywhere in the world. AAFES stores are only open to active, reserve, or retired military personnel and their families. With nearly $7 billion in annual revenues, AAFES operates one of the country’s largest department store chains.

Late 19th-Century Roots of AAFES

The origins of the AAFES date to the late 19th century, when trading posts were first established on military bases. Until then, itinerant peddlers known as “sutlers” had served the day-to-day needs of soldiers for such items as shaving gear and tobacco. In 1889 the U.S. War Department officially sanctioned the presence of base canteens, and six years later the department issued General Order 46 establishing a system of base exchanges at virtually every military post. Each military organization had its own system for the exchanges, with post commanders typically assigning an officer to run the unit. The commanding officers decided how to spend the profits. Soldiers soon began to refer to these post exchanges simply as “PXs,” and they relied on them for basic personal items that the military did not supply.

Shortly before the United States entered World War II, the government was in the process of reorganizing the system. In 1941 the Army Exchange Service was created as a civilian-staffed organization that operated on military bases. A panel of five private-sector businessmen recommended changes to the existing PX system. Ultimately a structure was created whereby a brigadier general headed an executive staff drawn from both military and civilian sectors, with civilians staffing the actual PXs. All independent PX facilities were purchased from their respective owners by the new Army Exchange Service.

With the war, the Army Exchange Service was called upon to support troops in the field, and the War Department created mobile units for this purpose. A catalog service was also started so that troops in remote locales could order items to send home to loved ones. In 1948 the organization was expanded to include the Air Force and was renamed, becoming the Army and Air Force Exchange Service, or AAFES. Air Force Exchanges were called BXs, for base exchanges, while the Army continued to use the acronym PX.

With many U.S. soldiers stationed as peacekeepers around the world following World War II and the Korean conflict, a demand for luxury goods on bases began to develop. In 1960 the government decided to allow foreign PXs to sell such items as electronic equipment and cameras, enabling soldiers to obtain American-made versions of these items overseas.

During the Vietnam conflict, expensive goods such as televisions and stereo equipment became big sellers at AAFES outlets. AAFES stores were still staffed by civilians in locations where no fighting was expected, but near the front, military personnel operated the exchanges, which were sometimes housed in a tent or the back of a truck.

Competition from the Private Sector

The rise of discount chains in the late 1970s, such as Wal-Mart, hurt business; these chains found it profitable to build stores near military bases. AAFES soon responded by lowering prices and improving customer service. New categories and products such as car care and food concessions were added at larger base facilities. Inventory control was computerized, and stores were redesigned during the 1980s so that they much more closely resembled their civilian counterparts. The military stores also began emphasizing merchandising, paying more attention to displays of goods and store layouts. By 1985 AAFES had 6,000 retail outlets and 2,300 food-service establishments. Worldwide revenues topped $4.8 billion, and the organization employed 70,000 civilian workers. AAFES undertook a further $183 million upgrade during the latter half of the 1980s, when it built a new $58.4 million distribution center in Newport News, Virginia.

AAFES’ business was now growing rapidly. Sales reached a peak of $7.4 billion in 1990. Of this, just under $6 billion came from retail sales; nearly $1.5 billion came from concessions, services, and vending, and almost $50 million was from catalog sales. The agency was now operating 130 Burger King franchises and 313 “Shopette” convenience stores, with plans to open more of both. AAFES was also arranging to offer H & R Block tax preparation services at some locations. A survey by the A.C. Nielsen Company showed goods cost an average of 23.2 percent less when purchased through AAFES than they did at conventional retail outlets, and this did not take into account the additional savings realized by not paying sales tax. Despite offering such low prices, AAFES was still able to put $229 million into morale, welfare, and recreational development programs during the year. About 70 percent of profits were so used, with the remainder spent to maintain and upgrade AAFES facilities. Starting in 1991, National Guard and Reserve personnel were allowed to buy at the facilities, further increasing AAFES’ customer pool.

The end of the Cold War and the subsequent reductions in military forces affected AAFES dramatically, however. With U.S. bases closing all around the world, the agency was forced to shutter some of its facilities. European bases were particularly hard hit, with troops reduced from 500,000 to 100,000 on that continent. By the mid-1990s revenues had dropped by approximately one-third and staffing was reduced by more than 10,000. The number of AAFES facilities had declined from a high of over 17,000 to fewer than 11,000, a figure that included everything from tent stores in temporary field locations to shopping center-sized complexes on 172 of the largest permanent bases. Despite the dramatic changes, the agency managed the transition smoothly and remained profitable, reporting net earnings of $269 million in 1995.

A Focus on Customers

One unique feature of AAFES, compared to its civilian counterparts, was its dedication to serving its customers even if profits suffered. Part of the organization’s purpose was to build morale, and serving the off-duty and recreational needs of military personnel was a key part of this mandate. The agency intentionally stocked marginal or money-losing exchanges at far-flung outposts with a wide range of goods to give service personnel more of the comforts of home. Although they made no profit, the exchanges at these locations did not raise their prices to make up the difference. Some 60 percent of AAFES stores fell into this category. Top selling items chain-wide included snacks, beer and tobacco products, along with electronics, sportswear, and athletic shoes.

The agency also provided a wider range of brand and price choices than its civilian counterparts. The customer base served by a PX could range from young enlistees and junior officers all the way up to top brass, and a single AAFES store might need to stock expensive Rolex watches alongside the budget-priced Timex brand. Wives of senior officers were particularly concerned about being able to purchase fashionable clothing, and AAFES made a point of having these items available for them. For budget-conscious shoppers, AAFES stores also offered private brand goods, which included a broad range of items, from health and beauty aids to clothing and photographic film. Total sales of private label items accounted for only about two percent of AAFES’s annual revenues, but this figure was expected to grow as the program was expanded and promoted.

Company Perspectives:

The Customer is the Business, and the Business is the Customer. This motto describes the way we feel about those we serve—including active duty, retirees, reserve forces, and their families. Around AAFES it is repeated often because we know that the customer is the most important person in the operation of our business. The key to satisfying our customers is our people. Whether an associate is directly serving customers or supporting another associate who is, it is their knowledge and commitment that is at the heart of AAFES’success. As members of the AAFES team, we must each day ask ourselves what we can do to make AAFES a better place to work and a better place to shop. We will never stop our efforts to improve our organization and ourselves. What our customers expect is simple. We must have efficient operations that provide the right merchandise at an excellent price and follow it all up with superior customer service.

In the mid-1990s, AAFES, using information from a data-warehousing program begun earlier in the decade, began to reconfigure its stores based on which types of goods were selling the best. They began to give more space to items like luggage, linens, home decor, and audio recordings. Stores were also being reorganized for their local market’s needs based on this data. The buying patterns at a large training-base PX were much different than those of the one located in Homestead, Florida, for example, where 90 percent of the customers were retirees. To improve its data gathering, AAFES earmarked $50 million to upgrade computer systems in 145 of the largest stores, with such equipment to eventually be installed in every location that generated more than $30,000 per month in sales. AAFES made an ongoing effort to learn directly from its customers. In the front of each store were commander’s communication cards on which customers could write questions or complaints. The organization also conducted surveys and focus groups, and each base had a council of spouses—male and female—that met with store managers to discuss their needs.

1990s Success with On-line Catalog Sales

AAFES’s catalog had grown by the mid-1990s into a full-color, 500-page volume. Qualified customers worldwide could order through a toll-free phone number, and delivery was free. Catalog sales typically totaled about one percent of overall revenues. In 1996 AAFES put the catalog on-line via its Web site, publicizing the move by printing the Web address on shopping bags, receipts, and in the catalog itself. The response was surprisingly strong, with Internet sales for the first year totaling one-tenth of all catalog orders. By the end of the decade, this amount grew to one-third of the total revenues. In 1998 features were added that allowed customers to access their AAFES-affiliated military credit card information on-line, make payments, and receive e-mail confirmations of payments. AAFES vendors could also check their accounts via the Web, an option that suppliers praised. The successful online catalog led Information Week magazine to rank AAFES fourth on its annual “E-Business 100” list in 1999.

AAFES stores’ distribution of pornographic materials received media attention in 1996 when the House of Representatives passed the Military Honor and Decency Act, which banned sales of pornography on military bases. Income from this category had totaled $12 million for AAFES in 1995. The ban was quickly struck down as unconstitutional, but was later upheld by the Supreme Court. The Pentagon ultimately issued a directive banning some 150 pornographic publications while allowing the stores to continue selling “softer” titles such as Playboy.

As the 1990s waned, AAFES continued to strike up new partnerships with private-sector companies. In 1999 a $1.5 billion, ten-year deal was signed with MCI WorldCom to provide long-distance, calling card, pay telephone, and other services to AAFES customers worldwide. The following year Booksamillion.com was also granted exclusive rights to sell books to AAFES’s 7.5 million customers over the Internet.

As it entered the 21st century, the Army and Air Force Exchange Service continued to provide its customers with a wide range of goods and services at discounted prices, while generating steady profits to fund morale-building recreational programs and facilities. Its mettle had been tested through wartime service as well as during the downsizing of the military following the Cold War, and the organization continued to survive and thrive. As long as Americans served their country in the Army and Air Force, AAFES would continue to be there for them with the goods and services they needed at attractive prices.

Principal Competitors

7-Eleven, Inc.; Best Buy Company, Inc.; Circuit City Group; Costco Wholesale Corporation; J.C. Penney Company, Inc.; Kmart Corporation; The Kroger Company; METRO AG; Sears, Roebuck and Company; Target Corporation; Wal-Mart Stores, Inc.

Key Dates:

1895:: U.S. War Department issues General Order 46 establishing stores at army posts.
1919:: The abbreviation “PX” is first used to refer to the Post Exchange, or base store.
1941:: Army Exchange Service is created to reorganize the existing PX system.
1940s:: Exchange Service goes to war; catalog ordering is introduced.
1948:: Expanding, the organization becomes the Army and Air Force Exchange Service.
1960:: Overseas exchanges begin selling luxury goods made in the United States.
1967:: AAFES headquarters moves from New York City to Dallas.
1980s:: AAFES responds to private-sector competition by upgrading stores and services.
1991:: National Guard and Reserve personnel are added to AAFES customer pool.
1996:: AAFES catalog goes on-line.
1999:: AAFES signs a $1.5 billion phone-service deal with MCI WorldCom.