Study: Increase Some Commissary Prices and Reduce Employee Wages

Military commissaries should increase some prices, carry a private-label brand and lower employee wages, according to a new independent report.

Those changes, which the highly anticipated document calls "win-win," along with other proposals to increase some local product sourcing and streamline operations, could result in annual savings of between $420 and $670 million -- but take three to nine years to implement.

The $1.4 million study, ordered by Congress in the 2015 National Defense Authorization Act, was conducted by the Boston Consulting Group on behalf of the Defense Department. Although not yet publicly available, a copy was obtained by Military.com.

The commissary system annually receives a $1.4 billion subsidy. Lawmakers and Defense officials have for several years proposed changes that critics warn would effectively defund the system and potentially result in higher prices and limited hours of operations.

Central to the changes proposed in the new report is for lawmakers repeal a rule that requires the Defense Commissary Agency to sell goods at wholesale plus a 5 percent surcharge, known as the "cost-plus" model. Instead the study recommends officials permitted to use a "variable pricing" system that allows them to set their own prices based on regional markets and the cost of goods.

A measure that would make that change is pending final approval by lawmakers as part of the 2016 version of the defense bill.

What the report does not recommend is raising prices across the board, an idea that has been floated in a variety of other plans and budget proposals. Instead, it suggests for officials reform to how they measure the savings shoppers get from using the commissary, then price items based on those findings.

Pentagon officials report that commission shoppers, on average, save about 30 percent by using the base stores compared to commercial outlets, officials report. The study’s authors, however, found shoppers save between 16 and 21 percent, depending on region and items purchased.

By varying prices to consistently stay within that savings window, rather than simply selling items at cost, the defense agency, known as DeCA, could turn a profit, according to the report. Doing so, however, would likely result in some price increases, it states.

"Some categories that are currently under-priced relative to the market (most notably meat) would likely increase in price," the report states.

The study dismisses as too risky Pentagon and lawmaker proposals of across-the-board price increases. A survey of 14,500 shoppers conducted as part of the research showed that a price increase of even 5 percent would result in a drop 25-percent drop in commissary trips. Instead, they said a small 1- to 3-percent increase could be safely done after prices are "normalized" regionally.

"Regardless of whether government decision-makers choose to pursue price increases, moving away from cost-plus pricing is critical to achieving many of the opportunities available to DeCA," the reports states.

Carrying a private-label brand could also bring a profit, according to the study.

Instead of creating and producing their own generic brand, which comes with significant initial costs, the study recommends for officials to co-opt the preexisting private-label brand of another company, such as Costco’s Kirkland brand. Doing so could bring a 20- to 30-percent profit margin while still resulting in prices below those of national brands, it says.

Another change proposed in the report would move all commissary employees from the current general schedule or wage grade system to a so-called non-appropriated funds, or NAF, status. The suggestion mirrors a plan in a report released earlier this year by the Military Compensation and Retirement Modernization Commission.

Because NAF employees often earn less, have different benefits and can be more easily hired and fired, the system could annually save between $125 and $225 million by changing systems, the Boston Consulting Group argued.

Employees would convert to the new system over two years during which they would maintain their current pay levels, the report suggests. Other benefits, such as their current retirement plans, would also move with them. New employees would be hired under the revised pay and benefits system.

Defense budget documents estimate that for 2015, the Defense Commissary Agency will spend $792 million on employee costs at 241 stores worldwide. For 2016, the agency projects that it will staff over 16,000 employees, with about 13,000 of those full-time. About 64 percent of current employees have a military affiliation, with about 28 percent of those being military spouses, according to the commission.

Other suggestions from the Boston Consulting Group include increasing local sourcing both stateside and overseas for some products, like bottled water and cleaning supplies, for an annual savings of between $5 and $10 million. Another proposal would streamline the way stores are laid-out to include more space for goods.

Still another recommendation calls for merging commissary and exchange shipping and operations for a $40 to $60 million annual savings. But the study rejected combining all commissary and exchange operations. Instead, it suggests the three military exchange companies operating on behalf of the Army, Air Force Exchange Service the Navy Exchange and the Marine Corps Exchange combine their operations into a single service. That move could save between $175 $265 million, the report states.

--Amy Bushatz can be reached at Amy.Bushatz@military.com.