Turnaround expert Tom Shull plucked the Pentagon’s PX stores from the brink of collapse, cut costs and goosed profits. Now he’s working to keep things that way as enlistment numbers decline.
At the Fort Cavazos army base stuck way out in the wilds of Texas hill country, hours from big cities like Austin and Dallas, the government-run PX store has two big draws above anybody else: location and no sales tax. On a recent spring day, it starts to get busier around lunchtime, with active-duty soldiers in uniform, military wives towing children and retirees browsing the aisles. Name-brand goods from Nike, Apple, MAC and Old Navy retail for up to 40% off.
“They like the prices,” said Maria Berrios Borges, the store manager. “And it’s right where they work. They don’t have to go anywhere.”
The store, which looks like a meld of Target, Home Depot and Best Buy, is run with military-level orderliness. Employees, the majority of whom come from military families, keep shelves neatly stocked, aisles clear and floors gleaming under good lighting. Situated just off Tank Destroyer Boulevard on a sprawling 340-square-mile base, it’s the closest place by far to pick up pet food, shampoo, a pair of jeans or a new Xbox for the 55,000 people who live or work there.
It’s part of the $8.5 billion (sales) government-run retailing operation, which manages over 2,000 big-box stores, convenience stores, gas stations and restaurants on U.S. Army and Air Force bases and more than 30 other nations where servicemembers are stationed. That makes the Army & Air Force Exchange Service, more commonly called the Exchange, the 54th-largest retailer in the country. It’s also one of the oldest surviving retailers, outlasting relics like Lord & Taylor, Sears and Stein Mart as it goes on nearly 130 years in business.
Being part of the Defense Department has its perks. The retailer gets free rent, which helps lower overhead costs. It doesn’t pay a cent in corporate taxes. And it’s exempt from antitrust rules, like those governing price-fixing, which allows it to band together with other, smaller government-run retailers like the Navy Exchange and Coast Guard Exchange to negotiate better prices from suppliers.
Last year, it was budgeted $230 million to cover the cost of transporting goods to difficult-to-reach places and to help comply with an executive order to raise the minimum wage for all federal employees to $15 an hour.
Combine that with little debt and healthy cash flow, and it’s enough to earn unusually high marks from the credit companies who scrutinize a company’s likelihood of repaying loans. In fact, the only retailers with higher credit ratings are Walmart and Amazon, behemoths with more than 60 times the scale.
The chance of a government bailout, if it were ever needed, doesn’t hurt. There is “a very high likelihood of extraordinary government support during stress periods, given its essential role in supporting military personnel,” Ilwaad Aman, an S&P Global analyst, wrote in a recent credit opinion.
Avoiding extraordinary government support and keeping the Exchange in the black, even as the customer base of active-duty personnel has declined 11% in the last decade, is the job of former Army officer and corporate-turnaround expert Tom Shull.
When Shull was brought on as CEO in 2012, the Dallas-based Exchange was a year away from running out of cash. Worse yet, nobody seemed to realize it. The stores had been run for over a century by military officials who were rotated in and out of the position every two years, meaning there was constant turnover at the top and leadership often lacked retail chops. Its stores were awash in boring private label brands and unwanted merchandise was frequently marked down.
“We had to get on with turning around the business quickly,” Shull, who started by closing underperforming stores and persuading hundreds of employees to take early retirement, told Forbes. A former soldier who went on to make a career reviving troubled retailers, Shull became the first civilian to run the Exchange and today is its longest-serving CEO.
Shull grew up as an Army brat. His dad was in the military for 30 years, joining the Army at the start of World War II and spending nearly three years in combat zones in the Pacific, where he served under General Douglas MacArthur. Shull was born in the Fitzsimons Army Hospital in Colorado, but as a baby moved to Rio de Janeiro so his dad could help track down Nazis who had fled to Brazil. He spent many of his teenage years in Germany, and remembers going to the PX store with his mom, where they had American staples like Campbell’s soup and always piped in music from back home.
He followed his brother to West Point and spent more than a decade in the service, completing Airborne and Ranger school before he was stationed at Fort Carson in Colorado in an infantry division.
He left the Army to get an MBA from Harvard, then got into retail. He took an operations job at Dallas department store Sanger-Harris after his friend Mike Ullman (who went on to become CEO of Macy’s and JCPenney) told him about a program to hire veterans. While he was there, the store conducted its first layoffs in its 100-year history and merged with Foley’s, a Houston-based department store chain. Rather than relocate hours away from his future wife, who was a buyer for Neiman Marcus in Dallas, he quit.
Shull took a job consulting for retailers at McKinsey, then became chief restructuring officer for Macy’s. In 1992, the storied department store had filed for bankruptcy protection with $6 billion in debt, and after failing to find a way to stay independent, Shull helped orchestrate its sale to rival Federated in 1994. He then led turnarounds at clothier Barney’s; Hanover Direct, a mail-order company; snack company Wise Foods; and Fred Leighton Jewelers, after it filed for bankruptcy in 2009.
Shull’s interest in saving brands was personal. He had watched his family’s Colorado-based cannery and creaming business go under. He had been interested in running the business after graduating from Harvard, but his uncle sold it, and the new owners surprised them by promptly gutting it. Every employee ended up being laid off.
When he was approached to turn around the Exchange in 2012 by a fellow West Point grad, Shull jumped at the chance. One of his first priorities was to spruce up the stores. “We couldn’t compete in many ways with Target or Walmart because we just didn’t have the presentation,” said Shull. “We had to clean up the look and feel of the store so it felt more like going into a Macy’s or Nordstrom than a discount store.”
The Exchange manages hundreds of convenience stores, as well as movie theaters, liquor stores, barber shops, dental offices and chiropractors.
Photo by Michael Thad Carter for Forbes
He began ditching private labels in favor of national brands. Last year, Gap, Old Navy and American Eagle merchandise hit stores. A new partnership with Home Depot lets shoppers purchase appliances online, tax-free, and have them delivered to their homes. The Exchange’s top-selling products worldwide are Apple AirPods, followed by Xbox and PlayStation 5 gaming consoles, Apple MacBooks and Samsung TVs. Private-label sales now account for just 5% of revenue.
Shull has also worked to expand the customer base, securing approval for some 20 million veterans and civilian employees to shop with them online. It’s partly an effort to grow sales as enlistment declines. Just 1% of the U.S. population currently serves in the military. More people have also opted to live off-base, meaning the Exchange has to fight harder to win business from those shoppers.
Gap, Old Navy and American Eagle merchandise hit Exchange stores last year.
Photo by Lauren Debter for Forbes
“We want people to think of us as they are driving to base and passing Walmart, Target and Best Buy,” said Scott Bonner, a regional vice president who oversees stores in the central U.S.
Revenue has fallen 17% since Shull started, a function of the dwindling customer base and steep competition from Amazon and big-box stores. So his bigger focus has been ringing every cent of profit he can from sales, with margins projected to be 4.5% this year, compared with Walmart (4.9%) and Target (6%).
None of it goes toward typical shareholder-friendly initiatives, like dividends or buybacks. Last year, 60% of its $356 million in profits was funneled to programs that help improve the quality of life on military bases. At Fort Cavazos, that money is helping to improve three playgrounds, a youth center, a golf driving range and the bowling alley, plus put Wi-Fi in common spaces. The facility is planning to build ten new cabins along the lake where families can staycation.
The Exchange is also called upon to shuttle food, water, fuel and other basic necessities during times of emergency. After Superstorm Sandy, it set up stores out of mobile trailers to support first-responders from FEMA and the National Guard. When Afghan allies and their families began arriving in the U.S. in 2021, it quickly set up temporary stores stocked with snacks, drinks, hygiene products and clothing to help meet immediate needs while the newcomers acclimated.
That type of all-in response is why the retail operation isn’t run by a private contractor. “Their No. 1, No. 2 and No. 3 consideration is shareholder value, and they are constantly getting pressured about it,” said Shull. “Our only obligation is to serve those in uniform and their families.”
The Exchange reinvests the remaining 40% of its profits back into the retailing business. Many locations have undergone multimillion-dollar remodels in recent years. Stores began offering curbside pickup during the pandemic, in step with larger retailers like Walmart and Target. It’s rolling out 1,100 self-checkout kiosks in the next year and has invested in price-monitoring software to keep tabs on what other retailers are charging, with electronic price tags so it can quickly update prices.
“People ask, ‘Why are they spending money on remodeling?’ Well, because we want the experience to be good when people come into the store,” said Shull. “All we’re trying to do is compete where we can, but we are very, very frugal with how we spend money.”
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Source: https://www.forbes.com/sites/laurendebter/2023/07/07/why-it-took-a-civilian-to-save-the-militarys-85-billion-retail-operation/