Pentagon Won't Merge Commissaries and Exchanges, for Now

The Defense Department has scuttled plans to merge the Defense Department's commissary system with the military branches' three separate exchange services.

In an April 4 memo to Pentagon leadership, Deputy Defense Secretary Kathleen Hicks ordered officials to "cease all efforts to consolidate the Defense resale entities."

According to Hicks, reviews of the proposal have shown that cost savings and efficiency improvements can be achieved in other ways that don't risk the stores' contributions to the military community.

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"Alternative approaches can realize the benefits of consolidation without the risks consolidation would bring to the mission," Hicks wrote.

A DoD report published in 2019 and endorsed by Pentagon leadership at the time recommended merging the Defense Commissary Agency with the Army and Air Force Exchange Service, Navy Exchanges and Marine Exchanges into a single entity, estimating that the consolidation could save between $700 million and $1.3 billion in the first five years and $400 million to $700 million annually in subsequent years.

The savings would have stemmed from eliminating the duplication that comes from running three separate exchange systems and the commissaries, which maintain their own management and administrative support systems, according to the report.

A 2020 analysis by the Government Accountability Office found fault with the DoD's estimates, saying that several underlying premises behind the savings were incorrect, having overestimated the number of identical products sold across the four systems and underestimated the cost of creating a new central headquarters and building a system-wide information technology system.

"Until the task force reassesses and updates, as necessary, its savings and costs estimates, DOD and Congress will not have reliable information to consider resale consolidation," the GAO report noted.

Although the DoD was unable to consolidate the systems without congressional approval, it continued efforts to prepare for the consolidation, a move that would have combined the commissaries, which sell subsidized, discounted groceries to shoppers plus a 5% surcharge to maintain stores and equipment, and the exchanges, which sell household items at a profit, funding morale, welfare and recreation programs such as fitness centers, child care facilities, recreation and other quality-of-life programs.

Critics of the proposed merger, including many military advocacy groups, raised concerns that the plan would hurt those facilities and activities for service members and their families that are not funded by Congress if the commissary system drained profits from the exchanges.

In 2020, the commissary system cost the Defense Department nearly $1 billion, down more than $300 million from 2017.

To continue to find savings and efficiency, Hicks directed the under secretary of defense for personnel and readiness to "concentrate future efforts on facilitating collaboration" between the four systems.

Hicks said they must report at least two times a year to the Defense Executive Resale Board on their cooperative efforts and also keep the deputy assistant secretary of defense for military community and family policy apprised of their efforts.

Defense Commissary Agency Director Bill Moore welcomed the decision, saying he was pleased with it in a statement Tuesday.

“We ... know it was based on the facts and valid assumptions presented in the [fiscal 2021] congressionally mandated Business Case Analysis update,” Moore said.

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

This story has been updated with a statement from the Defense Commissary Agency.

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