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Editorial Comment — October 2015

Preserve the Benefit …

The Secretary of Defense and his staff will have their hands full to come up with a single factbased all-encompassing plan by next March 1 to meet the requirement to achieve “budget-neutrality in the delivery of commissary and exchange benefits” by the beginning of fiscal year 2019, spelled out in the National Defense Authorization Act for FY 2016 Congress sent to the White House early this month.

They will have an even tougher time not putting the future of the force in jeopardy of unintended financial consequences.

Small, though significant, changes could make the exchange systems budget-neutral; but we question why anyone would want to trade a budget-positive program, as the commissary system appears to be, for a budget-neutral one.

If one accepts the Defense Commissary Agency's credo that it has been providing an overall 30-percent savings, in 2014 servicemembers obtained, as part of their compensation, $8 billion-plus worth of food and household supplies for a total cost of about $7 billion taxpayer dollars — making military resale facilities just about the only government operations in which taxpayers get more than what they pay for.

The Boston Consulting Group's Military Resale Study disputed the 30 percent figure, claiming that the overall savings was instead in the 16 to 21 percent range, varying by category, location and other factors. But DeCA's savings figure is based on analysis of all barcoded items over 26 weeks compared to supermarket prices nationwide, whereas BCG's figures were based on local neighborhood single-point-intime surveys of a comparatively tiny “market basket” selection.

The distinction is important. At 2014 sales and funding levels, savings of about 20.2 percent would make the present system budget-neutral.

This all assumes that Congress intends to pay servicemembers enough to buy their groceries, and will adjust pay and allowances accordingly (although with the number of military families eligible for “food stamps,” we sometimes wonder).

The Authorization Act grants wide leeway as to exactly what the plan can contain. While giving express permission to include closing commissaries in some areas, engaging major commercial grocery retailers “or other private sector entities” to provide discount savings for eligible patrons, or privatizing the commissary and exchange systems in whole or in part (and stopping only one or two steps short of suggesting consolidation of the exchange and commissary systems), the legislation leaves it entirely up to the secretary to determine the “appropriate” future configuration of military resale.

Congress has given DoD latitude to conduct almost any manner of pricing and privatization tests on commissaries and exchanges, using just about any methods and processes and legislative relief it might consider necessary to do so, as long as it sticks to quality, savings and customer satisfaction.

Proposals to “reform” the commissary system over the past few years have tended to focus on getting military families to buy different products (private label, fewer SKUs), spend more for them (variable pricing), travel farther to get them (close stores), cannibalize the exchange benefit to buy them in the commissary (beer and wine) or buy them elsewhere, off-base (discounts in commercial supermarkets). This year, serious consideration is also given for the first time to the Pentagon's washing its hands of the entire shebang and having someone else run it (privatization).

Lost in the shuffle in these proposals is the aggregate of billions of dollars of private investment over generations by firms specializing in selling to and supporting military resale facilities, and ignored or glossed over are their effects on the jobs of military family members working in the system itself and the companies that have supported it.

Causing some concern is the method the legislation prescribes for ascertaining the “discount savings” to prove the viability of any pilot program undertaken: it is the 50-items-out-of-12,000 “market basket” approach used by BCG for price comparisons with “lowest priced nearby competitor.” The “competitor” was in 40 of 51 cases Wal-Mart Stores.

Overlooked in the equation is that Walmart, with supermarket sales 40 to 50 times higher than those of the commissary system, far surpasses any quantity purchasing effort DeCA might put together to reduce cost of goods sold.

One difficulty in considering a government instrumentality like military resale as a business — as a Walmart competitor, for instance — lies in several major glaring differences between them: the instrumentality never has to concern itself as to whether there's enough money in the till to meet payroll; and its managers have neither a vested financial interest nor direct make-or-break fiscal accountability.

Founded about the same time as the commissary system, once known as the Great Atlantic & Pacific Tea Company and for many years the largest supermarket chain in America, A&P has just gone bankrupt and is fading into history. We are reminded that the only truly private label items we ever saw on commissary shelves were A&P house brands, selected by overseas commissary resale item boards in the 1960s; and we are concerned that the upheaval that current military resale system proposals cause may send the systems into the same diminished viability that brought about the demise of A&P.

We are not of the mindset that says nothing should be touched. Resale has a long track record of reforms that have led to progress. But in making them, the benefit has been preserved, even enhanced, not diminished.

Given commissaries' enduring significance to military families, as acknowledged by the Military Compensation and Retirement Modernization Commission (MCRMC), the RAND Corporation, Business Executives for National Security (BENS) and others, it is important not to lose track, in all the talk of efficiencies and pilot programs, of the effect price increases (needed to pay for the bulk of the defunded commissary appropriation) will have on patronage.

The BCG report indicates that nearly two-thirds of commissary patrons — 64 percent — are motivated by savings. With such a large number of patrons known to be price-sensitive, any pricing experiment becomes a very high risk proposition.

Some hope lies in the new incarnation of the old resale-wide Cooperative Efforts Board, currently transforming into the Defense Resale Optimization Board (DRBOB), which would logically be the action office actually drafting the plan envisioned in the NDAA. Under the aegis of Deputy Chief Management Officer (DCMO) Peter Levine, who reports directly to Deputy Secretary of Defense Robert Work, the board draws together senior resale and service leadership to lay the groundwork for a hopefully sane round of efficiencies.

Looking closely, as the legislation requires, into the numbers and counter-numbers from BCG, MCRMC, RAND, BENS and other consultancies, the new board can see why recommendations for thorough “bottomup studies” are peppered throughout BCG's proposals. There is good reason to get in the resale trenches and see how things really shake out on the store floor, versus expensive top-down theorizing.

Reports of other incipient proposals yet to be brought to light regarding ways to drastically cut top-to-bottom operating costs of the commissary system have been quietly circulating among thoroughly knowledgeable supporters of the system; perhaps they, too, can be fully developed before it is too late.

Changes of the magnitude envisioned in the NDAA involve risks, huge risks; and when all is said, done and tested, the patron should not have to pay the difference.

Preserve the benefit. Preserve military families; preserve readiness and preserve the future of the force.

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