Consolidate the Department of Defense's Retail Activities and Provide a Grocery Allowance to Service Members

The Department of Defense (DoD) operates four retail systems on military bases: a network of grocery stores (commissaries) that serves all branches of the armed forces and three separate chains of general retail stores (exchanges). One system of exchanges serves the Army and Air Force, a second serves the Navy, and a third serves the Marine Corps. This option would consolidate those systems into a single retail system that would operate more efficiently and without any appropriated subsidy. Like the current separate systems, the consolidated system would give military personnel access to low-cost groceries and other goods at all DoD installations, including those in isolated or overseas locations.

The existing commissary and exchange systems operate under very different funding mechanisms. The commissary system, which is run by the Defense Commissary Agency (DeCA), has yearly sales of about $6 billion, but it also receives an annual appropriation of about $1.3 billion. The three exchange systems have annual sales that total about $12 billion. They receive no direct appropriations; instead, they rely on sales revenue to cover most of their costs. A relatively small portion of their costs, such as expenses for transporting merchandise overseas, is paid from appropriations elsewhere in the defense budget.

The exchanges can operate without an appropriated subsidy because they charge customers a higher markup over wholesale prices than commissaries do. Also, because the exchange systems are nonappropriated-fund (NAF) entities--that is, they rely mostly on funds generated from sales to finance their operations instead of appropriations from the federal government--they have more flexibility in business practices for personnel and procurement. By contrast, DeCA's employees are civil service personnel, and it must follow standard federal procurement practices. This option is based on the assumption that consolidating the four retail systems would eliminate duplicative administrative functions and that DeCA's civil service employees would be converted to the NAF workforce.

Under this option, the commissary and exchange systems would be consolidated over a five-year period. At the end of that period, the budget authority required to operate the combined system would be lower by almost $2 billion per year. This option would return about a third of that amount to active-duty service members through a tax-free grocery allowance to each of the roughly 1.4 million active-duty service members. The grocery allowance would be phased in to coincide with the consolidation of commissary and exchange stores at each base. The net annual savings in budget authority by 2016 would be a little over $1 billion. Outlay savings to DoD over the next decade would total about $8 billion.

To operate within budget and without appropriated funds, the consolidated system would have to charge about 7 percent more for groceries and other merchandise. At the current volume of sales at the commissaries and exchanges, a 7 percent increase in prices would cost military personnel--active-duty, reserve, and retired-- and their families an additional $1.4 billion annually.

Active-duty members and their families would pay about $400 more per year, on average, but that amount would be offset by the new grocery allowance. Cash allowances would be particularly attractive to personnel who lived off base and could shop more conveniently near home or online. All military families would benefit from longer store hours, one-stop shopping, access to private-label groceries (which are not currently sold in commissaries), and the greater certainty inherent in a military shopping benefit that did not depend on the annual appropriation process. Another advantage is that the $400 average grocery allowance could be targeted toward specific pay grades or groups, with larger allowances given to enhance retention or to benefit junior enlisted members with large families, for example.

DoD's retail system would benefit as well. Commissaries and exchanges must now compete with online retailers and the large discount chains that have opened discount grocery and general merchandise stores just outside the gates of many military installations. Recent tightening of base security procedures and changes in the civilian retail industry have made it more difficult and costly for DoD's

fragmented retail systems to provide those services. This option would allow a consolidated system staffed by NAF employees to better compete with civilian alternatives.

One argument against consolidation is that about $750 million of the price increases would be borne by the military retirees who shop in commissaries and exchanges but who, under the option, would not receive grocery allowances. The average family of a retired service member would pay about $325 more per year for groceries.