Groups worry historic commissary reforms could fail
By TRAVIS J. TRITTEN | STARS AND STRIPES Published: December 23, 2016
WASHINGTON — Commissary-brand pasta sauce or breakfast cereal? It could be a reality for military shoppers next year.
New products with commissary labels along with new pricing on staples such as bananas, milk and soda are set to begin hitting store shelves in May. About 1,000 new items will be rolled out by the end of 2017.
The changes will mean new choices and some deals for shoppers. But they also signal a profound transformation of commissaries behind the scenes – a shift that groups representing troops and manufacturers worry could fail and imperil the on-base supermarkets.
Commissaries will for the first time try to make a profit by selling to military shoppers as part of a new business model being rolled out to save the global chain of 238 stores, which has seen falling sales for four years straight and is facing increasing pressure to slash its budget.
“Without lower commissary operating costs, we believe the future of the benefit is at risk,” Chris Burns, executive director for business transformation at the Defense Commissary Agency, said in a statement to Stars and Stripes.
The agency’s solution is to begin operating like off-base competitors such as Walmart and Albertsons to cover its $1.4 billion annual funding. That means aggressively pressing manufacturers to reduce costs, introducing a wide range of its own products and shifting prices at the local level.
If the test is deemed a success over at least six months, the Defense Department can permanently cut off commissaries’ annual federal funding and let the stores subsist on profits, according to a law passed this month by Congress.
It is a risky move for the military community – troops, families, retirees and disabled veterans -- that depends on the stores, said Eileen Huck, government relations deputy director for the National Military Family Association.
“If you break this system, how possible is it going to be to right the ship?” Huck said. “This is an entirely new business model. This isn’t something that they’ve ever had to do before.”
For shoppers, the changes will bring a raft of new products beginning in May.
The Defense Commissary Agency says its polling found about 60 percent of commissary customers say they would buy store-branded products. Many commercial grocery stores sell their own products – such as cereal, coffee and baby food -- that compete with well-known national name brands and typically sell for less.
Some Shoppers will also see lower prices on staples like bananas, milk, detergent and soda in a move to make those products more competitive with off-base grocery store prices. But some name-brand products will be pushed from commissary shelves and prices will increase on others, the Defense Commissary Agency has acknowledged.
Huck said shoppers could be turned off by the changing product selection and shifting prices and could abandon on-base grocery shopping, opting to go outside the gate.
“First of all, I think families will notice when private-label [commissary] products are introduced, especially if there is not room on the shelves for some of the national products that have been there,” Huck said.
An exodus of shoppers could spell trouble for other military businesses and recreation programs.
“If shoppers buy groceries at locations other than commissaries, they won’t shop their exchanges as often,” Mike Immler, deputy director of the Army and Air Force Exchange Service, wrote in an email to Stars and Stripes.
Commissaries help drive sales at local exchange stores, which sell consumer goods. The exchanges have long been for-profit businesses – without federal appropriations -- with the proceeds poured back into the military’s morale, welfare and recreation programs. Base gyms, libraries, travel groups and programs for single servicemembers all depend on the money.
“If either benefit is weakened, quality-of-life programs and ultimately military communities will suffer in kind,” Immler wrote.
The Defense Commissary Agency said it is “mindful of not damaging the commissary benefit” and will ensure shoppers still get the same overall savings.
Those who buy the new commissary-brand products will save the most, but avoiding the products will not mean paying more, according to Burns.
“We will be maintaining overall savings on branded products, so if patrons choose not to purchase a private label they will still be at least as well off as they were previously,” he wrote.
The majority of name-brand products will also remain on shelves. Those that are removed will either be replaced with a “strong substitute” or still be available in another size or quantity.
What is on shelves will partly depend on negotiations with suppliers. The agency is now discussing 8,000 products, which accounts for about 20 percent of its inventory.
The negotiations have rankled manufacturers that supply the stores. The Defense Commissary Agency is using “very aggressive” negotiating tactics aimed at forcing better purchasing deals and reducing commissary operating costs, said Patrick Nixon, president of the American Logistics Association, a group that represents manufacturers.
Nixon said tactics could force companies to walk and take their name-brand products with them. That happened with Duracell, which Nixon said cut ties after an agreement could not be reached on battery prices.
The commissaries are a delicately balanced business system and losses of manufacturers and products could create a point where the system tips toward failure, he said.
“You are going to find a whole range of items with high customer preference that could be eliminated,” Nixon said. “When you start tweaking that [commissary] model, first of all you’ll begin to challenge the patron’s confidence … The tipping point is when the patrons lose confidence in the benefit.”
Manufacturers already give the commissaries price deals that typically only go to the largest commercial competitors such as Walmart, which get special pricing because they can sell many more products, said Tom Gordy, president of the Armed Forces Marketing Council, another industry group.
Gordy said the Defense Commissary Agency’s push for even lower prices could be a bridge too far for companies.
“You are changing the dynamic of the relationship,” he said.
The Defense Commissary Agency may struggle to navigate all the complexities and concerns because it lacks the kind of experience that is needed, said Steve Strobridge, vice president for government relations at the Military Officers Association of America.
“What happens if there are unintended consequences and the [store] savings go down?” Strobridge said.
The agency might not be prepared to deal with that – or a loss of shoppers and suppliers – and that could throw the future of the stores into question, he said.
“We have some concerns about it,” Strobridge said. “Whenever you are venturing into unchartered waters you have a potential for unintended consequences.”