Commissary reformers eye repeal of 'cost-plus-5 percent' pricing

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A patron checks her smartphone while shopping at the Fort Belvoir, Va., commissary in April, 2015. (DeCA)
A patron checks her smartphone while shopping at the Fort Belvoir, Va., commissary in April, 2015. (DeCA)

Commissary reformers eye repeal of 'cost-plus-5 percent' pricing

by: Tom Philpott | .
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published: August 07, 2015

Defense officials appear ready to ask Congress to repeal a law that commissaries must sell products at cost plus five percent, a formula that for decades has ensured commissary shoppers everywhere pay the same prices.

Officials have drafted a replacement formula that would allow prices to vary from store to store to meet a new twin goal: reducing taxpayer support for commissaries while maintaining still attractive savings for patrons.

Variable pricing would seek to keep savings consistent across the commissary system by pegging local commissary prices for a market basket of goods at some target percentage level below prices of “lowest-price” competitors nearby such as Wal-Mart stores.

Critics of the plan, including suppliers and manufacturers of commissary products, say it would cut shopper savings overall and hit particularly hard those patrons who live in high-cost areas of the country.

That’s because setting grocery prices at, for example, 15 percent below competitive off-base retailers would impact shoppers differently if assigned to high-cost San Diego than to low-cost Fort Sill, Okla. Military members of equal rank and years served get the same basic pay regardless of location. If grocery prices are set not by cost but tied to local prices, the San Diego shopper would see a higher proportion of pay go to groceries than the shopper at Fort Sill where food prices, on and off base, are lower.

Defense officials contend, however, that through variable pricing shopper savings can be preserved and stores can operate with business-like efficiency. That, in turn, would allow cuts in the $1.4 billion annual appropriation of the Defense Commissary Agency (DeCA), an announced goal of the department for the past couple of years.

“DOD’s stated objective all along has been to reduce appropriations for the commissary benefit,” said Candace Wheeler, spokesperson for The Coalition to Save Our Military Shopping Benefits, which includes groups representing suppliers and manufacturers of good for military stores as well as military associations and national veterans organizations.

“The problem is that their ‘business speak’ does not match their ‘budget speak’,” said Wheeler. Defense officials use “a myriad of business arguments…about a better commercial approach. The fact is they want to increase the costs to military patrons and make them feel good about it.”

The idea of replacing cost-plus-five-percent with variable pricing is presented in DOD’s “draft” response to recommendations for reforming on-base store operations from the Military Compensation and Retirement Modernization Commission, which released its report last January.

Defense officials intend to reject, at least for now, the commission’s call to consolidate DeCA and the three military exchange services into a single defense resale system. They note that DeCA and exchange services, which run base department stores and a host of other retail outlets, serve different purposes. Commissaries offer groceries at a discount and rely on appropriated funds. Exchanges sell products and services that generate profits and help to fund on-base morale, welfare and recreational activities. Exchanges get little taxpayer support. Indeed, the deeper discounts offered at commissaries help to attract exchange customers.

A merger now, before adopting common business processes and developing a solid business plan, would be impractical, officials contend. But they also assert that with some legislative relief, including repeal of cost-plus-five-percent pricing, they can maintain current shopping benefits and achieve efficiencies that “result in significant savings for the taxpayer.”

To do this they need more flexibility in how commissary products “are sourced, where they are sold and how they are priced.” This would free commissaries “to adopt best commercial practices and act in a more business-like manner without reducing the benefits” to shoppers.

Requiring that all goods be sold at cost plus a five percent surcharge is a disincentive to efficient business practices, says DOD’s draft document. Any retailer forced “to charge the same markup across its entire stock assortment will not be able to achieve the same efficiencies as a private-sector entity operating within a profit-driven market,” it says.

Congress ordered DOD a year ago to commission a study of the military resale system by business experts who could propose changes to make stores more efficient while preserving the benefit. That study by the Boston Consulting Group is almost complete. An early draft runs to 270 pages and identifies actions to save DeCA by as much as $700 million a year.

Topping its list of “win-win opportunities” for taxpayers and patrons is transition from cost-plus-five-percent to variable pricing. This would allow the introduction of private label goods if Congress removes a mandate that commissaries can stock only national brands. Commercial grocers use private labels to offer lower prices and raise profit margins. DeCA could too, it says.

Current commissary pricing, it says, prevents DeCA from capturing any profit beside the five percent surcharge. That means DeCA, in effect, incurs a loss on each transaction. With cost-plus, it says, higher sales mean higher costs, a perverse incentive for retailers. That leaves DeCA with few levers to pull to cut costs that aren’t negative for shoppers, such as reducing store hours. It also dampens its incentive to lower prices because that would mean lower surcharge revenue on which it relies to modernize stores.

Critics say many costs targeted by consultants actually are the unavoidable expense of delivering a prized shopping benefit to the military.

One part of the Boston Consulting Group study that can’t thrill DeCA casts doubt on its claim of 30 percent average savings. Most patrons don’t believe that claim, the report says citing its own survey, and the claim doesn’t survive price comparisons with popular grocery stores off base.

“When compared to the lowest priced nearby competitor, we believe most patrons are actually experiencing 15 percent [to] 20 percent savings in [continental U.S.] locations,” the report says.

It cautions against narrowing savings too sharply, however. One finding of its patron survey is that a five percent price increase would shift 30 percent of commissary spending elsewhere.

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