Exchanges resist plan to merge with faltering commissaries

by Tom Philpott

Defense Department officials want Congress to include in its fiscal 2019 defense policy bill new authorities to execute its plan to merge the Defense Commissary Agency (DeCA) with the three military exchange services under a single system of on-base stores to be called the Defense Resale Enterprise.

Resisting that effort out of public view are executives of the exchange services who fear their own success in running base department stores, gas stations and convenience outlets, which generate profits to support on-base morale and recreational activities, could be put at risk by some of the policy executives they blame for deepening the decline in sales across the commissary system.

Congress two years ago gave the department authority and new tools to “transform” base grocery stores, which for generations relied on taxpayer dollars to offer a wide array of brand products to military families and retirees at cost.

In addition, shoppers pay a five percent surcharge to fund the modernizing or replacement of aging commissaries.

The goal of recent reforms is to turn commissaries into profit-generating stores, similar to exchanges, thus lowering the $1.3 billion annual subsidy so that money can be diverted to more critical needs for sustaining a ready fighting force.

Congress insisted, however, that overall savings to patrons not drop, even as DeCA phases in more business-like practices. Two big ones are variable pricing of goods to replace the tradition of selling at cost, and adoption of commissary-label goods to compete for patron dollars with a narrowed selection of national brands.

Manufacturers over the past year have competed through pricing for commissary shelf space. Surviving brands, in turn, often have cut coupon offerings and other promotions to make up for lower pricing, say industry sources.

Meanwhile, they have complained, it’s unclear whether their reduced profit margins are being passed on to patrons or retained to offset commissary operating costs. So far, critics in industry contend,one clear consequence of commissary reforms has been to accelerate declining sales.

Policy officials implementing the reforms are now seen as doubling down on their bet, insisting that, to survive, military resale stores must consolidate to squeeze out inefficiencies, rescue commissaries and evolve into super retailers to more effectively compete with commercial stores, not only on prices but on providing a more attractive, rewarding and convenient shopping experience.

Officials are warning Congress, store suppliers and advocates for military shoppers that defending the status quo, amid falling sales, will jeopardize “the department’s ability to ensure the long-term viability” of base stores.

The comment appears in a draft legislative proposal for creating the Defense Resale Enterprise by merging DeCA with the Army & Air Force Exchange Service, Navy Exchange Command and the Marine Corps exchange system.

A merger, the proposal contends, will reduce reliance on appropriated funding; eliminate management redundancies; increase standardization of processes and systems; cut operating costs, and generate greater margins on goods sold “to be reinvested in price reductions, morale, welfare and recreation program funding and capital reinvestment.”

It also contends it “will increase the enterprise’s agility to respond to dynamic mission, industry and patron requirements and trends; and (to) ensure the long-term viability of these services” as benefits of military service.

Sources say exchange officials are concerned that the team executing what so far are unproven commissary reforms is directing a merger of all resale operations with misleading claims. They are bristling at briefing materials to explain merger plans that lump exchanges in with DeCA as distressed operations. That’s just wrong, exchange leaders are contending, according to sources.

For example, AAFES touts that it has almost doubled earnings from sales over a recent five-year period, from 3.2 percent in 2012 to 5.9 percent in 2016, despite an 11 percent force drawdown across Army and Air Force in those years.

Also, its website business is growing 50 percent annually and AAFES says it consistently has delivered about $375 million annually to support MWR programs.

And yet, sources say, to win support for a merger, Defense officials have portrayed exchanges as part of a failing resale system. The only store system that has been mismanaged, particularly against outside competitors, is DeCA, they insist. One internal communication referred to DeCA “the elephant in the room,” with sales down 20 percent since 2012 and current reforms aggravating patrons rather than turning sales around.

On April 12, Defense officials briefed some military associations on merger plans, perhaps also learned what sort of resistance to expect. Advocacy groups say they need to learn more.

“We are open to ideas that could make the system more efficient as long as they also preserve the value of the benefit for military families,” said Eileen Huck, deputy director of government relations for National Military Family Association.

Priorities for families are to sustain shopper savings, improve the in-store experience and ensure proper funding of MWR programs, Huck added.

Streamlining of backroom processes across base stores to gain efficiency, without diluting the shopping benefit, “is something we support,” said Brooke Goldberg, director of military family policy for Military Officers Association of America. But how does a full merger of stores benefit the exchanges, she asked.

“We don’t have answers on that,” she said.

“The intriguing part of all this is the untapped potential of commissaries…(T)here are things that should be explored (to) preserve that benefit. But we also want to preserve the exchange benefit,” Goldberg said. “Any change to the commissary that negatively affects the exchange is not something we support.”

Steve Rossetti, director of government affairs for the American Logistics Association, the industry trade group for businesses supporting military resale, cautioned against using exchange earnings to underwrite a wider resale enterprise. The earnings belong to patrons, he said, and have been used for decades to reinvest in exchanges and support MWR to improve base community programs.

Rossetti suggested Defense officials should focus first on reversing the falloff in sales at commissaries before launching a merger with exchanges to try to gain long-term efficiencies, and also that they “take a long hard look before they leap to ensure benefits truly outweigh costs.”

There’s fear a broken commissary system, and the quest to cut taxpayer support of it, could endanger still thriving exchanges if, through merger, their profits are seen as a life raft to save grocery discounts as the law requires.

The draft legislative proposal, however, describes different goals aimed at keeping all base retail operations competitive, for example by allowing exchanges and commissaries to combine into single stores.

This could “respond to generational shopping habits” and to market forces “impacting all traditional grocery and retail stores,” it says. “Millennials (ages 22-36), who collectively represent the majority of military shoppers, (are) using technology to shop and save, and are driven by speed, convenience, proximity, variety (rather than brand) and experiences.”

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