More Questions About Military Stores

April 1, 1998

The list of America’s largest retail operations contains many of this country’s most familiar brand names, from Sears and Wal-Mart to J.C. Penney and Safeway. But it would not be complete without an addition many might find surprising: the Department of Defense.

Despite the steep decline in the size of the US military since the end of the Cold War, the Pentagon infrastructure of on-base groceries, department stores, and other retailers remains one of the most extensive consumer operations in the nation. Its annual sales exceed $14 billion, and it employs some 100,000 civilian workers—one for every 15 uniformed members of the US Air Force, Army, Navy, and Marine Corps.

The relatively low prices and convenience of on-base commissaries and exchanges rank among the most valued benefits of military membership, according to survey after survey of the armed forces’ rank and file. Moreover, many retirees view access to the stores as a right earned through years of service. For their part, top DoD officials see the Pentagon’s retail system as an inexpensive way to foster a sense of military community.

However, the system—and its subsidies—has long been controversial. Some lawmakers question whether a network that was created when many military bases were geographically isolated is relevant in an age when civilian discount shopping is available in the smallest of towns. They have attempted during recent years to impose reductions and cutbacks.

“Under Attack”

As the Air Force Association said in a recent policy paper on the subject, the system “once again … is under attack.”

The lessening of the federal government’s big budget deficits may reduce Congressional pressure to make cuts in the Defense Department retail system, but DoD’s proposed Fiscal 1999 spending plan would make individual services responsible for far more of the costs of their consumer sales activities. Moreover, a new Congressional Budget Office report again calls into question the value of the system and likely will generate new pressure.

The CBO study flatly stated, “From a social perspective, government-run stores with below-market prices are not a cost-effective alternative to cash compensation.”

The DoD retail system is a vast, multifaceted operation. It covers everything from groceries to clothing stores to fast-food outlets and cappuccino carts. In general, however, it can be divided into two parts: commissaries and exchanges.

Of the two, commissaries have the deepest military roots. They date to the immediate post–Civil War years, when Congress authorized the Army to sell foodstuff at cost to military personnel at Ft. Delaware, Del. This first commissary resembled the dry-goods stores of the era. It had a single counter, and customers made their purchases from a list of 82 items carried in stock.

Today’s military commissaries are intended to be the equivalent of civilian supermarkets, in their selection of goods if not in prices. There are some 300 of the stores on DoD bases around the world, all of them run by the Defense Commissary Agency since the agency was activated in 1991.

Commissaries sell food and other grocery items at a flat five percent markup. This profit margin is used to pay for the cost of capital investments, utilities at US–based stores, and store supplies such as bags and cash register tapes.

The cost of labor, transportation, and overseas utilities are paid by DeCA, which in turn receives its funds from a direct Congressional appropriation. In 1997, DeCA received $936 million in appropriated funds. It sold goods having a wholesale cost of $5.2 billion and collected around $250 million in surcharges.

Today’s system is largely a product of the early years of the Cold War era, when the Pentagon took on the responsibility of providing town-like services to a large population of married personnel living on an expanding base infrastructure. Between 1954 and 1972, commissary sales more than tripled, to a high of $7 billion.

At that time, DoD said the commissary system was needed to provide consumer choices to isolated facilities. From the late 1970s onward, however, this concern shifted to an emphasis on the overall benefits commissaries can provide.

Now, DoD defends the system as an important noncash means of compensation for active duty and retired military members. DeCA estimates that a dollar spent in a commissary buys the same market basket of goods as $1.40 spent in a commercial supermarket.

Military exchanges are different from commissaries both in their goods and in their pricing and financing.

Whereas commissaries are basically food stores, exchanges more closely resemble department stores or, in some cases, retail malls. Their offerings can cover the whole spectrum of consumer wants and needs, from clothing for kids to a quick doughnut, tax-preparation services, or even pay telephone connections.

Exchanges are not part of DeCA or any other federal agency, for that matter. The three separate exchange systems, the Army and Air Force Exchange Service, Navy Exchange System, and Marine Corps exchanges, are run as nonappropriated-fund (NAF) activities. That means the revenues they get from sales are not part of the federal budget; however, typically about two-thirds are distributed to the services for their Morale, Welfare, and Recreation programs. The remaining one-third funds salaries and capital improvements for the stores.

Videos and Burgers

Of the three exchange systems, AAFES is by far the largest, with 219 main retail stores and some 10,000 smaller services ranging from video rental to burger joints. Its 1997 sales were upwards of $6.9 billion.

AAFES shares a number of basic goals with its Navy and Marine counterparts. These include providing service members with an important noncash benefit by selling goods and services 20 percent cheaper than commercial prices, ensuring that overseas military personnel have access to familiar US goods, and raising NAF earnings that can be used to subsidize morale-boosting activities and facilities, such as golf courses.

About 78,000 people work in exchanges. Half of them are from families of active duty personnel, making the store system an important source of supplementary income for many servicemen and -women.

Total exchange system sales in 1997, for all three systems, were about $9.1 billion. That figure alone would make the Department of Defense among the top 15 retailers in the United States.

Whatever their funding and product differences, military commissaries and exchanges serve the same basic customer base: the widely dispersed population of active duty soldiers, sailors, airmen, and marines; military retirees; and reservists. (While they have unlimited access to exchanges, reservists currently are limited to 12 commissary visits per year, one day per month.)

Within this base, retirees are becoming more and more prominent, as the number of retired members of the US military has now come to outnumber active duty personnel. The percentage of sales made by the Pentagon’s retail services to retirees has been gradually increasing since the 1960s, according to DoD figures.

A DeCA survey found that retirees and their families accounted for 54 percent of US–based commissary sales in 1993, with 38 percent going to active duty personnel and seven percent to reservists. Similarly, retirees account for about half of the sales at US exchanges.

Some subsidiary exchange services, such as pay phones, are primarily convenience items used by active forces, however.

Seven Only

The fiercely competitive nature of civilian retail operations, with the spread of discount stores and malls across the country’s landscape, means that active duty military families do not have to rely on on-base stores for their daily shopping. In 1995 only seven commissaries in the US did not have a commercial equivalent within 10 miles. Two of those seven were Dugway Proving Ground, located in the remote reaches of Utah, and Ft. Irwin, in the California desert.

According to DoD figures, the typical active duty US military family buys about 60 percent of its groceries from on-base commissaries and makes 30 percent of its general retail purchases at exchanges. The more senior the military member, the more money his or her family spends at base retail outlets. This is unsurprising, given that older personnel have both more cash and, generally, more expenses. Senior active duty officers typically spent $2,300 in commissaries in 1995, according to a DoD survey. Senior enlisted personnel spent $2,000. Junior officers spent $1,200. The survey also noted that junior enlisted personnel spent an average of just $500, probably because many are single and eat in dining halls.

As retirees become more and more important to per-store sales, exchange and commissary officials face pressures to rethink their mix of products. This problem is particularly acute for exchanges.

Retirees, whose children usually are grown and gone and who usually have more money to spend on themselves, are prone to purchase high-markup goods of relative luxury: china, handbags, and the like. Younger active duty personnel are often looking for more downscale items, such as cheap school clothing for kids.

“Finding the appropriate balance between discount store and upscale department store has long been a source of controversy for the exchanges,” the CBO noted in its study, “The Costs and Benefits of Retail Activities at Military Bases,” published last October. “But that controversy has intensified in recent years as the size of the active duty force has declined.”

It is important to remember that this problem largely is confined to bases in the United States. Overseas commissaries and exchanges tend to serve a customer base that is much more heavily weighted toward those still in uniform. Seventy-three percent of the patrons of commissaries in Europe, for instance, are active duty personnel or are members of their families.

Overseas stores account for about 16 percent of total commissary sales and some 25 percent of total exchange receipts. Often, the local exchange is the only source of US–style music, videos, or reading material for young military families that suddenly find themselves in a foreign culture. And the higher retail taxes in many European countries make the tax-free nature of on-base retailing much more attractive.

“Like commissaries, overseas exchanges make an especially important contribution to the lives of US military personnel and their families,” concluded CBO.

Target of Critics

The Pentagon’s vast retail system has long been the target of criticism from Congressional deficit hawks concerned about its cost and from private retailers concerned about the competition that the system poses to their own enterprises. These critics argue that most commissaries and exchanges no longer serve their original function of providing shopping services that otherwise would not be available. Raising troops’ pay would be a more efficient method of compensation, some contend.

CBO analysts claimed that the United States could save roughly $1.5 billion by shuttering its commissaries and exchanges and giving larger paychecks. It is not only the direct $1 billion subsidy to commissaries that is at issue, the analysts said, but also foregone taxes and services provided to DoD’s retail stores, which also constitute a tax on Americans.

CBO’s savings figure includes a pool of $500 million used to increase military basic pay about one-half of one percent. Such a direct subsidy would make up for the lost lower base costs of commissaries and exchanges, said CBO, and would be easy to target at midcareer noncommissioned officers and other personnel the American military most wants to retain.

Standing to lose the most would be military retirees, the report acknowledged. At present, they enjoy lifetime shopping privileges in the military stores. That would be taken away, with no compensating increase in military retired pay.

CBO said on-base shopping should be contracted out and limited to fast-food and other services attractive to active duty forces. The study claimed that the military role in retail has grown and persisted partly because many of its costs, such as foregone taxes and return on capital, fall outside the bounds of the federal budget.

“If DoD faced the full cost of its role in retail activities, it might well reassess and reduce that role,” stated the CBO report.

Others, including AFA, don’t buy that argument. AFA, as a matter of policy, strongly supports the Pentagon’s retail system as an important part of the overall military benefits package. The AFA position is that the commissary privileges of Guard and Reserve members should be expanded and become comparable to those enjoyed by active duty members and retirees. Moreover, it said, the restrictions on what military exchanges can sell should be eased or lifted.

Said AFA’s 1998 Personnel Policy Paper: “Easing or eliminating restrictions would give exchanges new flexibility and allow them to compete better with civilian retailers. However, these changes will need approval of Congress and are being bitterly contested by many retail trade associations with considerable political clout.”

It appears unlikely that the CBO study will result in quick, drastic change in the DoD retail system. However, it will be the central focus of House hearings later this year. And the Pentagon does continue to look for ways to trim its retail operations and save within the basic infrastructure that now exists.

Consolidation is one option. Blending the three service organizations that currently oversee exchange operations could save overhead, for example. The Pentagon is also experimenting with combined commissary–exchange stores, where food items are sold at the basic five percent markup but nonedible items are sold at higher exchange-style markups. Such “BX Marts” exist at NAS JRB, Carswell Field, Texas, and Homestead ARB, Fla.

Some cuts have already been made. Since its inception DeCA has closed some 100 stores, many of them as part of the base realignment and closure actions.

Pressure on Services

Now the Pentagon is taking action to make the services more cognizant of commissary costs.

Under the Pentagon’s proposed 1999 budget, DeCA would no longer receive its $1 billion subsidy as a Pentagon line item. Instead, the Defense Department will distribute that money to the military services. Then it will ask for it back, in the form of budget contributions to DeCA from service MWR budgets.

The plan would allow the services to increase funding for commissaries, if they wish. But military officials are not necessarily happy about the proposed move, which they think might mean competition for MWR funds between commissaries and other quality-of-life programs such as child care centers.

DeCA officials reply that the change would recognize the importance of commissaries in military quality of life and the role of the services in funding decisions. They also point out that the 1999 budget foresees a fixed baseline of commissary funding through at least 2003—something they interpret as a vote of confidence in the system.

“In essence, this process has reaffirmed the importance of the commissary benefit to the military community,” said the DeCA director, retired Army Maj. Gen. Richard E. Beale Jr.

Peter Grier, the Washington bureau chief of the Christian Science Monitor, is a longtime defense correspondent and regular contributor to Air Force Magazine. His most recent article, “Making the Case for FEHBP,” appeared in the March 1998 issue.