This article by Karen Jowers originally appeared on Military Times, the nation's largest independent newsroom dedicated to covering the military and veteran community.
Defense officials have backed off plans to consolidate the commissary and exchange systems, according to a new DoD report citing flaws in their previous recommendations about the benefits of a merger.
Such a plan would actually cost an additional $1.5 billion, according to a new DoD report to Congress, signed Aug. 23 by Virginia Penrod, acting under secretary of defense for personnel and readiness.
The previous analysis, completed in 2018, had a “single-minded fixation” on cutting costs, diverting the focus away from the customer, the new report stated. “Successful retailers are currently focused on digitization and the customer.”
DoD “has determined that the 2018 [business case analysis] recommendation to consolidate the resale organizations is not feasible, and no longer supports such a consolidation,” concluded the report to Congress.
The projected costs of a consolidation “have increased substantially and are now prohibitive,” according to the new report. The defense resale system includes the Defense Commissary Agency, the Army and Air Force Exchange Service, the Marine Corps Exchange and the Navy Exchange Service Command.
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Those costs would likely have been borne by customers, reduced contributions to quality of life programs on military installations, or both, said Steve Rossetti, president of the American Logistics Association, a trade group of manufacturers and distributors who supply products to commissaries and exchanges.
For years, some officials within DoD have taken aim at the cost of the commissary benefit in particular, which receives about $1.1 billion a year in taxpayer dollars to provide discount groceries to authorized customers in the military community around the world.
Advocates, long concerned that consolidation could pose a threat to the future of the commissary and exchange benefits, were also concerned that DoD was moving too quickly toward a merger.
“First and foremost, we’re concerned about preserving the commissary and exchange benefits,” said Nicole Russell, government relations deputy director of the National Military Family Association. Many families rely on the benefits, “especially those struggling financially,” she said, because of the competitive prices. “We’re glad DoD has finally closed this chapter and is focusing on a lot of other issues important to our families.”
In 2019, NMFA was among 27 groups in The Military Coalition who sent a letter to the House and Senate armed services committees saying that if costs of a merger were more than anticipated in that 2018 analysis, the defense resale system might not be able to continue to provide low-cost groceries, and support for MWR programs on military installations.
The new report found that the previous analysis did understate the costs of a merger, and overstated the savings a merger could achieve.
The new analysis found the consolidation would require an additional $1.5 billion in costs that were understated in the 2018 analysis, which was conducted by a DoD task force, primarily with consultants Boston Consulting Group.
Customers “deserve to know that every dollar they spend at the cash register is going to be well managed,” Rossetti said. “DoD recognizes that. This study makes the case. Congress was wise to order the reevaluation. This yields a more realistic view that will serve the patrons better. If they had moved to [merge the organizations] with inaccurate numbers, it could have been a train wreck.”
Among the underestimated merger costs were the costs for integrating the IT systems of each of the exchange systems and the commissary system. The 2018 report didn’t address the cost of merging and relocating the headquarters of the organizations.
The 2018 analysis and recommendations led to then-Deputy Secretary of Defense David Norquist giving the green light to consolidation in 2019, pending required changes in law that would allow consolidation.
But plans were put on hold. After questions were raised about the validity of the 2018 analysis, Congress ordered a review by the Government Accountability Office. GAO concluded that DoD and Congress needed more reliable information on the expected savings and costs of consolidating, which prompted Congress to order another DoD review.
[RELATED: GAO Report Solidifies MOAA’s Concerns With Proposed Commissary-Exchange Merger]
The new DoD review states that DoD can get significant benefits for the resale systems and their customers “without the massive upheaval and investments of time, money and talent that consolidation would consume.”
DoD instead intends to pursue additional savings and efficiencies like their Joint Buying Alliance, which began in late 2019. Since then, officials said, they’ve saved military customers $75 million, including $45 million by lowering prices on goods in several departments, such as health and beauty, and electronics; and another $30 million by identifying special buys with vendors. This alliance includes the commissary agency, AAFES, NEXCOM, MCX and Coast Guard Exchange.
The 2018 business case analysis recommended eliminating 20 percent of products to save money, but didn’t identify any consumer research to justify that. In the 2021 report, DoD found that one otherwise successful commercial retailer tried to cut costs by eliminating 20 percent of its stock assortment, but the resulting customer reaction and drop in sales “quickly convinced the retailer to reverse course and reinstate the dropped products.”
This 2018 recommendation to reduce customer choices by eliminating some products is a dated approach, “in contrast with successful and fast growing retailers who focus on the consumer and innovation. This contradicts the 2018 [business case analysis ] assertion that customer experience would not be impacted,” the new report found.
That 2018 report also double-counted some expected savings, which also contributed to the overestimates of the savings through a merger.
Risks and Impacts
The 2018 report didn’t include any assessment of the risks a merger would pose to the commissary and exchange benefits — nor did any of the previous studies on consolidation.
The new report did, stating: “The department has identified unacceptable risks and consequences associated with consolidation.”
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Between 60 percent and 90 percent of corporate/commercial consolidations have failed completely, or at least failed the pre-consolidation financial and operational goals, according to the 2021 working group’s extensive literature review.
Mergers that succeed usually improve a company’s competitiveness, such as acquiring new technologies, buying out competitors, expanding to new customer segments, extending the operating footprint, or leveraging intellectual property. “None of these advantages that define successful mergers is relevant to military resale consolidation,” the 2021 report states.
And merging these organizations is not as simple as merging two discount retailers. Among the many issues to be considered are the numerous lines of business between the entities, such as selling groceries, and varying retail operations such as retail stores, restaurants, lodging facility operations, movie theaters, convenience stores. Each exchange has at least three lines of business that would normally be separate commercial companies, the 2021 report notes.
“As a result, consolidation of defense resale is really a 10-plus way consolidation over a worldwide footprint.” The risks “have the potential for very significant unintended consequences and long-term negative impacts on the resale organizations,” the report stated.
Yet another complexity: the commissary system is “radically different” in fundamental areas from the exchange operations, to include the fact that the commissary agency gets the majority of its operating funds from taxpayer dollars, and isn’t focused on making a profit. Commissaries sell most of their products at cost plus a 5 percent surcharge at the cash register.
[RELATED: Help MOAA Build a Better Commissary Benefit]
Unlike commissaries, exchanges sell their goods at a profit. They rely on sales and other revenue, to cover operating expenses. Revenue generated by the exchanges also helps fund certain morale, welfare, and recreation activities.
And the stores have a variety of impacts on the military mission, some of which were starkly apparent during the pandemic, which started well after the 2018 report. For example, commissaries were designated as “mission essential” and have stayed open for the most part during the pandemic.
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