Military Update: Variable pricing considered by DOD for use at commissaries
Despite congressional criticism, and charges by military associations of benefit tampering, the Department of Defense has hired consultants to do a quick study on use of “variable pricing” in base grocery stores.
By law, commissary items are sold at cost plus a 5 percent surcharge, which is used to renovate and replace aging stores. With variable pricing, items could be sold above or below cost. But to test the concept, the Bush administration needs to win approval from a skeptical Congress.
The $500,000 study began Jan. 12 and has a tight deadline. A final report is due to the Defense Commissary Agency (DECA) by Feb. 27.
“If the study says variable pricing won’t work in commissaries, we won’t pursue it,” said DOD officials in written responses to questions posed by Military Update.
John McHugh, R-N.Y., chairman of the House armed services subcommittee that oversees military stores, said he worries that the department seeks to raise store prices and use the revenues to reduce the $1.2 billion that the department spends on commissary operations annually.
“The clear danger of variable pricing is that where you charge less [for some items], you’re inclined in other areas to charge more,” said McHugh. “And if what you’re trying to do is find justification to cut appropriations to commissaries, you use it as a means to increase revenues.”
Defense officials said variable pricing, in theory, should provide “greater flexibility to manage the overall savings that customers receive.”
The goal, they continued, would be “to provide average savings to commissary customers of 30 percent over similar items sold by commercial grocers, regardless of the location of the commissary where they shop.”
This administration is the first to adopt a specific 30 percent savings goal for commissary shoppers. Some critics note that the current average savings is 32 percent over commercial grocers.
By replacing cost-plus-5-percent with variable pricing, they suggest, DOD could convert any savings now over 30 percent into revenues via higher prices. Rather than stay in shopper pockets, the money could reduce the $1.2 billion subsidy.
Defense officials admit to trying to lower the subsidy. But they contend variable pricing could create a “better commissary benefit.”
“Although average savings in the United States are 32 percent, some customers save over 50 percent while others save less than 20 percent. We are interested in determining the feasibility of using variable pricing to more evenly distribute savings to all commissary shoppers,” officials said.
The House Armed Services Committee will oppose any initiative that would raise prices or reduce the commissary subsidy, McHugh said. Besides being a threat to shopper savings, he added, variable pricing could change the character of commissary shopping.
“It goes contrary to the across-the-board savings concept that has been extended to virtually every item on commissary shelves since commissaries were in existence,” McHugh said. More patrons will feel obliged to comparison shop off base. Over time, he said, the convenience of commissary shopping will be weakened and so will the benefit.
It seems the Defense Commissary Agency even opposes the idea. The January edition of “What’s New,” a DECA newsletter for employees, DECA leaders said they reviewed variable pricing and concluded it “would fundamentally alter the benefit, fundamentally alter our relationships with our business partners and would not be a prudent action to take.”
Still, it was DECA this month that awarded the contract for a Variable Pricing Feasibility Study to two firms, Dove Consulting Group, Inc. of Boston, and Willard Bishop Consulting, Ltd., of Barrington, Ill.
McHugh and Rep. Vic Snyder (Ark.), ranking Democrat on the Total Force Subcommittee, had complained to Defense Secretary Donald Rumsfeld last November that the then-proposed study raised doubts about the administration’s commitment to preserving the commissary benefit.
If the study endorses variable pricing, Defense officials likely will ask Congress for money and authority to test the concept in fiscal 2006.