Key Pentagon Official Endorses Commissary-Exchange Merger

A key Pentagon official has thrown his support behind merging the military's three separate exchange systems and the Defense Commissary Agency into a single defense resale entity, directing a task force to begin planning the consolidation.

The Defense Department is prohibited by law from undertaking consolidation without new legislation. But in a memo to defense leadership Aug. 19, Deputy Defense Secretary David Norquist said he supports the move and has directed personnel to undertake planning and determine what can be done under current law to finance a consolidated enterprise.

If a law is enacted, Norquist said he will decide whether to create a new agency to oversee all defense resale facilities or expand an existing office, such as the Defense Commissary Agency, to manage the new system.

The support comes after completion of a business case analysis of the proposed merger by a Pentagon Chief Management Office task force, which found that consolidation could save between $700 million and $1.3 billion in the first five years and $400 million to $700 million each following year.

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It would cost the Defense Department roughly $75 million the first year to consolidate, increasing to $150 million a year for three years.

The eventual savings would stem from eliminating duplication that comes with running three separate exchange systems and the commissaries, all of which maintain their own management and back office support systems.

Savings would also come from eliminating "redundant supply chains and highly overlapping product lines," according to the DoD Report on the Development of a Single Defense Resale System.

"Consolidation would produce benefits such as reducing duplicative costs and creating a more efficient workforce," the report notes.

Under the plan, commissary and exchange buildings would remain separate and each would retain their distinct storefronts, with the Army and Air Force Exchange Service, Navy Exchanges and Marine Exchanges looking largely as they do now.

"Should consolidation occur, it could be achieved without any material change to the customer experience or store footprint," the report states.

The overhaul would be the largest change to the military retail store system since the individual services' commissary systems were combined into the Defense Commissary Agency in 1991.

From 1989 to 2015, there have been a dozen studies on consolidation, each recommending mergers of parts of the systems or in their entirety.

The commissary and exchange systems differ significantly in that the exchanges, which sell goods and services, operate at a profit to fund military morale, welfare and recreation programs such as fitness centers, child care facilities, outdoor recreation, movie theaters and other quality-of-life benefits.

Commissaries are supported by funds appropriated by Congress, selling subsidized groceries to shoppers at cost plus a 5% surcharge that is used to refurbish and maintain stores and equipment.

In fiscal 2017, commissary operations cost the Defense Department $1.3 billion, a figure that has prompted calls for eliminating the commissaries or reforming them. Consolidating the exchange systems and the Defense Commissary Agency would present financial process issues, but the task force noted that, with planning, the commissary system could be converted into a non-appropriated fund program, the same as the exchanges.

In March, the Military Coalition, a group of 27 military and veterans organizations that represent 5.5 million service members, veterans and family members, wrote a letter to the House and Senate Armed Services committees urging them to conduct tight oversight of the proposal.

The concern is that the cost of operating the commissaries as non-appropriated fund facilities would drain profits from the exchanges that currently support hundreds of quality-of-life programs.

The groups said they aren't opposed to the concept but urged caution in implementing changes to what they described as a "fragile military community ecosystem that may impact other important programs."

The House version of the fiscal 2020 defense policy bill includes a provision that would prevent the Pentagon from pursuing consolidation until after the General Accountability Office has reviewed the business case analysis.

Norquist has also directed the task force to move ahead with assessing the feasibility of continuing or cutting off defense working capital funds to finance the commissaries.

Starting Jan. 1, 2020, the commissaries and exchanges will see an influx of new customers, with more than three million disabled veterans, Purple Heart recipients and veterans' caregivers gaining access to the stores. The expansion amounts to a 50 percent increase in potential customers.

Norquist promised that the ultimate goal of considering the merger is to continue providing quality services for troops and families, as well as to be good stewards of taxpayer money.

"The department's intent is to improve community services for our service members and their families, improve support to commanders and fulfill its fiduciary responsibility concerning appropriated and non-appropriated funds," he wrote.

-- Patricia Kime can be reached at Patricia.Kime@Military.com. Follow her on Twitter @patriciakime.