Pentagon Abandons Its Support for Merging the Commissary and Exchange Systems

The Defense Department has scuttled efforts to merge the Defense Commissary Agency and the military services' three separate exchange systems, finding that the plan would not result in the billions in savings originally projected in 2018.

In a report obtained by Military.com this week and sent to Congress in late August, defense officials said a new business case analysis of the proposal found no economic benefit to the consolidation and that it actually would cost the department an additional $1.5 billion.

"The 2021 business case analysis update shows that all the signs are pointing in the wrong direction for consolidation," stated the report, signed by Virginia Penrod, acting under secretary of defense for personnel and readiness.

For decades, Pentagon officials have eyed the consolidation of the military's resale systems as a cost-savings measure and conducted numerous analyses over the years on the proposal.

In the 2018 report, released in 2019, a task force organized by the Pentagon's Chief Management Office and a contractor, Boston Consulting Group, 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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Shortly after that report was published, then-Deputy Defense Secretary David Norquist directed personnel to determine what could be done under the law to work towards consolidation.

A complete merger of the four systems -- the Defense Commissary Agency, the Army and Air Force Exchange Service, the Marine Corps Exchange and the Navy Exchange Service Command -- would require congressional action.

Last year, the Government Accountability Office found fault with several underlying premises of the Pentagon's business case analysis, saying the report underestimated the costs of creating a new headquarters and building information technology infrastructure and overestimated how many duplicate products could be streamlined across the four systems.

Following release of the GAO report, Congress ordered the DoD to do another analysis. The new review concurred with the government watchdog, finding that the 2018 analysis understated the costs of a merger and overstated the savings it could achieve.

"The updated [business case analysis] also shows that, just like all the previous consolidation studies, those estimates failed to account adequately for the risks, opportunity costs, and second- and third-order consequences of such actions," the report noted.

The 2021 analysis also found the consolidation could rack up an additional $1.5 billion in costs for the factors left out of the 2018 study -- information technology structure, the headquarters relocation and more.

Pentagon officials noted that the exchanges already have realized savings by buying in bulk across the systems and the commissaries.

"The Department determined that it could achieve a significant portion of the projected benefits without the massive upheaval and investments of time, money, and talent that consolidation would consume," the report noted.

The commissary and exchange systems differ significantly in how they are run.

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

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.

In 2017, commissary operations cost the Defense Department $1.3 billion, a figure that has prompted calls for eliminating the commissaries or reforming them.

In 2020, however, commissaries saw a surge of patrons and sales, largely due to military personnel, families, retirees and disabled veterans stocking for the pandemic and shopping throughout the year. The Defense Commissary Agency posted record-breaking sales numbers in early March 2020 and finished the year with nearly 1% increases in revenue and sales.

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

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