Commissary-exchange merger unnecessary, official says

By Karen Jowers, Staff writer

Defense officials have concluded that a merger or consolidation of the military’s commissary and exchange systems is not necessary, said the official leading the efforts to find taxpayer savings in the department’s resale operations.

“We believe we can get efficiencies without consolidation,” said Peter Levine, the Defense Department’s deputy chief management officer, speaking to the annual convention of the American Logistics Association.

Defense officials, spurred by lawmakers’ rejection of DoD proposals over the last couple of years to drastically cut the level of taxpayer dollars that operate military commissaries, have changed the way they are looking at the stores, Levine said.

Defense officials had proposed cutting $1 billion of the roughly $1.4 billion annual commissary operating budget, a proposal perceived as being driven by the need for money, rather than the need for reform. Exchanges operate for the most part without taxpayer funding.

The thinking among DoD officials also has been colored by recent recommendations from the Military Retirement and Compensation Modernization Commission and the Boston Consulting Group.

Studies by both groups recommended consolidating the commissary and exchange systems. However, both studies also concluded that DoD can attain significant savings without reducing the benefit to the military community.

Lawmakers were concerned that focusing on cutting taxpayer dollars would directly result in a cut to the commissary benefit — the significant savings customers enjoy in those stores compared to off-base grocery stores.

Those taxpayer dollars, which cover commissary operating costs, enable the stores to sell groceries at cost, giving military patrons an average of about 30 percent savings over civilian stores outside the gates.

Now, Levine said officials will “look for efficiencies first and let efficiencies drive the budget, rather than the other way around.”

Over the next six months, a new Defense Retail Business Optimization Board will review a number of recommendations for efficiencies, looking at areas of common business practices, such as acquisition and warehouse systems, and develop a plan for these savings, Levine said. The board includes the leaders of the exchange and commissary systems.

But legislative change also is needed, Levine said, including a more flexible pricing system — also known as variable pricing — in which officials are allowed to raise prices on some items and lower them on others.

By law, items in commissaries now must be sold at cost, defined as what the Defense Commissary Agency (DeCA) pays for the item from the manufacturer or distributor. Customers also pay a five percent surcharge at cash registers, which is used to fund store construction and renovation.

Defense officials also want legislative authority to allow DeCA to sell its own private-label items. “It doesn’t do DeCA any good to do [that] under the current pricing system,” Levine said.

While a private label does require oversight and marketing within the organization, the idea is that these items would give patrons another savings option, while also providing DeCA some ability to make a profit that would cover some operations costs.

Levine said officials also are looking at ways to expand the customer base, but did not elaborate on that point.

A proposal in the pending 2016 defense authorization bill would require DoD to come up with a plan to operate the commissaries without taxpayer dollars by fiscal 2018, while maintaining the customer benefit.

DoD has determined that the most that can be cut out of the commissary budget by that time is $300 million, a little over 21 percent of the current annual operating budget.

“The only way to get $1.1 billion in additional savings is by reducing savings, closing stores or both,” Levine said. “My message is that we can’t take that drastic step and expect to maintain the benefit.”