Setting Up Shop

alking into some federal facilities can be like browsing in a small de-partment store or specialty shop. From furniture and linens to jewelry and recordings to stationery and celebrity memorabilia, Uncle Sam has something to offer almost everyone. For the brand-conscious, there are logo items such as CIA golf balls, FBI ball caps and Postal Service coffee mugs. Shoppers can also pick up staples such as postage and boxes and collectibles such as coins.

At least a dozen agencies have retail enterprises, whether they are large-scale operations for the public or small shops for employees and visitors. Agencies hail their retailing efforts as a way of strengthening budgets without tax dollars and creating a positive public image. "We're looking for a brand presence that celebrates our place in American history," says Pam Gibert, the Postal Service's vice president of retailing.

The Smithsonian Institution in June announced an aggressive plan to expand its earning potential by consolidating commercial ventures under a new organization known as Smithsonian Business Ventures. The institution's board of directors hired Gary Beer, former president of the Sundance Group, a spin-off of the independent-film enterprise founded by actor/director Robert Redford, to head the organization, which will operate as a part of the Smithsonian.

The organization will consolidate Smithsonian magazine, the museum shops, the mail order business and other commercial activities, which brought in $147 million last year. Of that, $70 million came from retail sales in the museum shops and catalogs. Although Congress provides more than 70 percent of Smithsonian funding, the appropriations are used only for buildings, operating costs and salaries and expenses. Smithsonian's commercial revenue, which is used for research and exhibitions, has declined for years, officials say.

Core Business

For agencies in which retailing is a core function, the sale of goods and services is big business. At the Postal Service, $15.5 billion in revenue last year came from retailing, although 85 percent of that was postage. Still, USPS earned $141 million in its sales of tape, packaging materials and prepaid telephone cards. Items not considered central to mail service-T-shirts, hats, coffee mugs and coloring books and other logo items-brought in $44 million.

While selling items such as postage and packaging may not seem like retailing, it figures prominently into USPS' marketing strategy. In what's known as the "curb to counter" retailing plan, post offices in recent years began displaying products in open-merchandising displays designed to appeal to customers who may not buy them if they are hidden behind the counter, Gibert says.

Marketing of the items is worked out in USPS' "planning room" at headquarters, which is adorned with charts showing heavy buying periods for residential and business customers. Those "drive periods" are sorted into six categories: Thanksgiving and Christmas, Valentine's Day, the April 15 income tax filing deadline, spring (Mother's and Father's Day and graduations), summer and back-to-school. Post offices display certain items more prominently at different times of the year, such as phone cards that appeal to college students who are about to return to campus.

USPS also has tried to attract customers through convenience. New post offices are designed with designated areas for different needs, such as mailing help, do-it-yourself stamp buying or retail shopping. Postal officials now are going a step further by allowing business customers to set their postage meters remotely, rather than bringing them into the post office. Also, smart cash registers based on personal computer technology will allow postal clerks to do everything from looking up ZIP codes and printing money orders to accepting electronic signatures of customers, Gibert says. "We're trying to extend ourselves out into where people do business and not force them to make a trip to the post office," she says.

Another agency in which retailing goes to the core of business is the U.S. Mint. Of nearly the $2 billion the Mint received in revenue last year, mostly from circulated coins and bullion, $137.5 million came from retail items including commemorative coins, annual coin sets, jewelry, watches and logo items. "Retailing, to us, is crucial to meeting our mandate for this line of business," Mint Director Philip Diehl says.

The Mint meets that mandate by marketing to coin collectors, who number 1.5 million in the United States plus a substantial international market, Diehl says. The agency tapped into the international market when it sold coins in 45 nations commemorating the 1996 Olympic Games. The Mint generates revenues with surcharges on commemorative coins authorized by Congress and sold by foundations. With a typical surcharge of $10 on a $35 coin, the Mint has earned $400 million on the coins since 1982, Diehl says.

Stiff Competition

One of the strongest retail sales agencies in government is the Army and Air Force Exchange Service, which operates about 300 discount and convenience stores, gas stations, fast food franchises and barber shops around the world, and generated $7.2 billion in sales revenue last year. AAFES is the third largest owner of Burger King restaurants in the world. The Navy and Marine Corps run separate but similar exchange programs that drew 1998 revenues of $1.7 billion and $563.4 million, respectively.

The exchanges are a benefit for active-duty service members, reservists and military retirees. But because 98 percent of the exchange program's operating budget comes from sales revenues, service officials say they must be as competitive as their private-sector counterparts-Wal-Mart, Kmart and Target. "We consider ourselves to be very competitive," says Terry Wagner, AAFES' vice president of main store hard lines, which include items other than clothing and textiles.

"We're not there just because we got a location on base. We consider this a benefit to our customers. We offer them goods and services wherever they go." For the Exchange Service, that can mean opening stores on short notice, usually in tents, in places like Albania, Haiti or Saudi Arabia.

Unlike their competitors, the exchanges must offer products even if they're not profitable. Prices for goods such as military clothing and meals for Department of Defense Dependent schools are set on a break-even scale. The challenge, Wagner says, is to remain competitive with 17 major business lines, instead of being able to specialize in items such as clothing or sporting goods, the way many private retailers do.

Because the exchanges have a limited consumer base, they must try to tap into every possible customer, Wagner says. The toughest sells are those living off base, such as retirees or National Guard members and reservists, he says. Moreover, Exchange Service advertising is limited by law to a weekly, in-house tabloid sales flier mailed to potential customers. The Exchange Service conducts demographic studies to determine which products to promote. The studies often conclude that young families, the Exchange Service's biggest customer base, should be targeted with advertising and sales on products such as diapers and baby formula, Wagner says.

On a Short Leash

While agencies pattern their retail divisions and marketing strategies after those in the private sector, there is one distinction that sets them apart: They are all under the watchful eye of Congress. And most, at one time or another, have been called down by lawmakers concerned that federal retailing was infringing on private industry. In fact, Congress even regulated itself when it divided the House supply store in the late 1980s into separate supply and gift shops. The change, made in the wake of a high-profile controversy about government perks, meant that Capitol Hill employees could no longer buy personal items on official purchasing cards and the public, which can no longer use the supply store, cannot get discounts at taxpayer expense, a House official says.

Another federal retailing operation that has been feeling the heat on Capitol Hill is the Bureau of Prisons' Federal Prison Industries. Since 1934, the organization has sold goods and services to other agencies through its UNICOR program, which employs 20,200 inmates. Created to reduce inmate recidivism by teaching job skills, UNICOR brought in $534 million in revenue last year, all of which goes back into the program. UNICOR also receives a congressional subsidy, which was $3.8 million last year.

UNICOR generates 150 different product lines in 99 factories at 64 prisons, including office furniture, electronics, military uniforms and helmets, mattresses, circuit boards, towels and draperies, as well as jet starter cables for Patriot missiles. Services include printing, data entry, vehicle component remanufacturing, equipment repairs, laundry and recycling. About 60 percent of UNICOR's customer base is in the Defense Department.

Therein lies the problem. The Defense Department is a major consumer of UNICOR because it has to be. The law that created the program says that if UNICOR can produce the goods or services needed, DoD has to give it first right of refusal in competing for contracts. The law has been challenged many times by those who say it unfairly shuts out private-sector bidders who may do better work at a lower price.

Sen. Carl Levin, D-Mich., made a strong attempt at overturning the law last spring in an amendment to the $289 billion Defense spending bill. Sen. Phil Gramm, R-Texas, however, was successful in his opposition to Levin's amendment when the Senate voted 51-49 against it. "Would we rather have people in prison working, helping to defray the cost of their imprisonment and compensating victims or would we rather have them sitting in air conditioning, watching color TV?" Gramm says. "To me, that's an easy decision."

Gramm and other supporters of the program say safeguards are already in place to prevent a UNICOR monopoly. If UNICOR cannot produce an item or if it can't produce it as quickly as an agency wants, it must grant a waiver for the agency to allow open bidding on the item. UNICOR issued more than 12,000 such waivers last year. Also, any new UNICOR products must be approved by a presidentially appointed board of directors made up of representatives from the Justice, Labor and Defense departments and the private sector. Most requests for new products are rejected out of concern for competition with the private sector, Craig says.

With an inmate population explosion of 300 percent since 1980, the program continues to grow. "It's not a business, it's a major correctional work program," Craig says. The program's incentive for inmates is UNICOR's 19 cents to $1.50 per hour wages, compared to the 12 cents to 40 cents per hour they can earn at other prison jobs, Craig says.

Also, inmates who take part in the programs are more easily employed after leaving prison and are 20 percent less likely to return, he says.

Cutting Their Losses

The Bureau of Prisons won its battle with Congress, but this fall the House was again considering a bill that would end the UNICOR procurement mandate. And other agencies have had little luck recently on the Hill. AAFES expects to lose $11 million this year from a congressional decision to prevent the exchanges from selling pornographic magazines and videos. The exchanges also are still banned from selling TVs larger than 35 inches in a long-standing restriction to prevent AAFES from competing with electronics retailers.

Under pressure from Congress and companies such as United Parcel Service and Federal Express, Postmaster General William Henderson changed course on a major retailing campaign developed in the mid-1990s by his predecessor, Marvin Runyon. The business plan was designed to help make up for postage revenue lost to electronic communications, particularly the Internet. Henderson has restricted sales of non-postal retail items to the Postal Service's catalog, Web site and shops such as those in the Mall of America in Minneapolis and the Postal Museum in Washington. USPS began phasing retail items other than packaging and stationery out of post offices this year.

The Postal Service could receive more congressional intervention if Congress passes the Postal Modernization Act, which was reintroduced this year as HR 22. Sponsors of the bill say it would "level the playing field" with private industry by forcing USPS to create a separate agency to sell non-postal retail items. The agency would be regulated as a private company and subject to federal income taxes, a congressional staff member says. The bill also attempts to limit experimental products by mandating that test products "cannot create an unfair or otherwise inappropriate competitive advantage for the Postal Service, particularly in regard to small business concerns." The bill was passed out of subcommittee and had not been scheduled for a House Government Reform Committee vote at press time.

Profitability of new products became an issue after the General Accounting
Office found that USPS lost $84 million on 19 products developed between 1995 and 1997. Only four of the products turned a profit. GAO noted, however, that "it may not be reasonable" to expect new products to become profitable in such a short time.

Some agency officials say congressional restrictions have forced them to be more entrepreneurial. Postal officials still are considering opening more agency-run shops to sell retail goods, Gibert says. The Postal Service has looked at several "super mall" locations like the one in Minneapolis, including the outlet giant, Potomac Mills, in Woodbridge, Va., she says.

The Mint has tried to maintain a narrow product line, sticking mostly with coins, under the threat of congressional restrictions. Agency officials also have focused on marketing. Because Diehl considers the Mint a contender in the collectibles market, agency advertisers and marketers target, through brochures and the Internet site, young people who may otherwise choose to collect baseball cards, Beanie Babies or even rare or foreign coins (which the Mint does not market).

"If we don't take the opportunity to interest them, particularly in their preteen-age years, we have a much tougher sell later," Diehl says. The Mint has had to revive its customer base after market research showed that most began collecting coins as children in the 1950s and '60s when wheat pennies, buffalo nickels, Mercury dimes and silver dollars were still common.

With few collectibles left in circulation, the Mint had to come up with an idea to jump-start coin collecting. Its answer was the new quarters with a different design for each of the 50 states. The agency began issuing the Delaware, Pennsylvania and New Jersey coins this year. With a $300 million appropriation from Congress, the Mint hired the Coopers & Lybrand consulting firm to do a market study before going ahead with the new coins. "We had to make certain the American public would embrace the program," Diehl says. The Mint sells the quarters in bags of $100 for $29.95, securing a $4.95 profit on each bag.

Another retailing tool Diehl and other agency heads are hoping to cash in on is the Internet. And it appears that is already happening. The Mint sold more than $17.5 million in merchandise in seven months after launching its products on the Internet March 1, he says. "We have got to be on the cutting edge of retailing," Diehl says.The efficiency of the Internet may allow it to take over as the Mint's best medium for retailing soon, he adds. The Mint also sells products by mail and at its three shops in Denver, Philadelphia and Washington. But the Web site allows the agency to save money on promotional brochures and mass mailings and enables employees to ship products to customers within a day of receiving the order, he says.

AAFES also has found that Internet sales are becoming critical to its revenue base. Its Web site, launched in mid-1996, added $531,788 to fiscal 1997 catalog sales of $53.1 million and $8.4 million to 1998 sales of $57 million. The site is projected to grow to $11 million in revenue this year, says Air Force Capt. Cliff Ozmun, an AAFES spokesman.

AAFES officials have found that the Web site creates a new dynamic in both customers and competitors. "A lot of people say the main thing they like about Internet shopping is the ability to shop from home," Ozmun says. It is that untapped customer base and creative use of resources that government retailers say they must have to compete in an expanding marketplace that still offers few breaks for federal players. Some government retailers are adopting tougher business perspectives they hope will change negative attitudes about federal sales.

"I think of the American taxpayer as our stockholders," Diehl says. "When I turn money over to the Treasury, I'm turning it over to our stockholders."

Lisa Daniel is a Washington-area freelance journalist.