Balancing the lure of tax-free against a multitude of marketing challenges

DSN Retailing Today, Oct 25, 2004 by Emily Scardino

AAFES appears to have a retailer's ultimate dream: a captive audience. However, while this may be true in far-off lands on remote military bases, it is simply not the case in the U.S. market. "There is competition everywhere, with everyone from Wal-Mart, Kmart and Target to major department stores," said Mike Westphal, senior vp of marketing at AAFES. And, since only military personnel can shop at AAFES, there is also a limited customer base and a somewhat restricted ability to expand. As a result, Westphal and his team, which includes Angela Terry, vp of direct marketing and Bob Carreras, vp of marketing and advertising, are working on a tight marketing budget, "less than a half of a percent of total sales."

To keep sales strong and drive traffic, "We do our best to get the message out that we save our customers money and provide exceptional values," through a combination of print and in-store marketing. In-store radio and TV are also important domestically, with ads in more than 660 AAFES locations, while overseas television advertising takes place via the Armed Forces Network.

Marketing to America's troops requires an in-depth understanding of who they are. While young men are obviously an important component, with a core customer base of troops in active duty between ages 18 and 25, the definition of an AAFES shopper is much broader. AAFES customers are multicultural, from a variety of ethnic and socioeconomic backgrounds. Male and female, young and old, they are not dissimilar to the extensive range of customers a Wal-Mart or a Sears works to bring into its stores. There are young families buying washers and dryers, retirees purchasing holiday gifts and teenagers snapping up DVDs and video games.

"We have everyone from new enlistees to four-star generals shopping our stores, shoppers from all segments of the military community," said Westphal.

Meeting the challenge to reach these customers on what is a relatively limited marketing budget, the company has found, "many ways to attract customers, key strategies to connect with our market," noted Westphal.

Strategies include targeting shoppers with print advertising and other promotional materials. There are 68.2 million fliers distributed on an annual basis, with 19 million going directly to customers' homes 20 to 30 times a year. Items vary by climate and region, with local buys featured prominently in international locations.

In these marketing materials, the company shows its customers that AAFES is competitive on price involving core key items, such as HBC products, in deals leveraged through its vendor relationships. While Westphal notes that other retailers have tremendous buying power that can drive prices down, AAFES depends on its private label to help retain consumer loyalty.

The company also has a steady flow of clearance merchandise on the floor that provides a reason for customers to stop by frequently. And they do, with visits averaging multiple times a week from its best shoppers. Especially for troops far from home, there is an emotional connection with AAFES, a place filled with the products and brands they grew up with, and likely cannot find elsewhere.

However, one of the most exciting marketing weapons in Westphal's arsenal is the fact that there is no sales tax on items, on an everyday basis. Even if a certain item is a dollar or two more expensive at AAFES than at a competitor's store, without tax the difference becomes negligible. On major appliances or consumer electronics, this could save a customer a significant amount.

The budget-friendly and increasingly popular trend toward grassroots marketing is also important at AAFES. In-store events provide an exciting way to bring customers into stores. Westphal noted that a recent event on a Texas base involving the Dallas Cowboys cheerleaders was a great success.

Some of the daily attributes of the stores also serve as retailtainment. The company offers restaurants in stores, bringing retirees in for brunch and families in for dinner. Westphal stressed the importance of its proprietary food concepts, developed by Richard Sheff, vp of the food and theater division. The No. 1 private QSR concept exclusive to AAFES is Anthony's Pizza, in its 20th year. The goal is to create a fun environment and unique taste sensations with these eateries that keep "bringing customers on base and encouraging them to shop."

The assortment also varies according to store size, which could be anywhere from 20,000 square feet to 110,000 square feet. This has an obvious impact on the number of SKUs available in-store.

In this case, the Internet provides a way to significantly grow sales, since the company can offer a much greater breadth and depth of product in relatively limitless cyberspace. It also has a shared audience including the Navy Exchange and Marine Corps Exchange.

Westphal spoke at length about the importance of the Internet to AAFES. It has proven an extremely effective and cost-efficient way to get and stay in touch with its far-flung customers. The company has a newsletter that goes out to customers via e-mail to keep them up to speed on the latest goings-on. There is an item-of-the-week program to drive sales. It is also a way to let customers know how much money they are saving at AAFES. The site has posted a current market basket study involving some of its major competitors showing AAFES saving its shoppers an average of 28% over the rest.