The Army & Air Force Exchange Service is installing plastic shields at cash registers in its stores, such as this one at Fort Hood, Texas, to protect customers and associates from COVID-19. (AAFES)
More reliable information is needed about the potential costs and savings associated with the Defense Department’s idea to merge its retail and grocery organizations, according to a government report.
A Defense Department task force created to review the merger found it would cost about $500 million but the DOD could save between $690 million and $1.3 billion within five years. But that group might have overestimated savings and underestimated costs when analyzing the merger that was first suggested to Congress in 2018, according to a report from the Government Accountability Office.
Instead, the GAO recommends the Pentagon revisit the potential costs and savings of merging the Defense Commissary Agency, which sells groceries in 240 commissaries around the globe, with its three retail organizations, the Army and Air Force Exchange Service, the Navy Exchange Service Command and Marine Corps Community Services. The three retail exchanges operate 2,500 facilities that include department stores, uniform sales, gas stations, food courts and convenience stores on military bases worldwide.
While the exchanges operate almost completely from the sale of goods and services and use profits to support military families through morale, welfare and recreation programs, the DeCA received about $1.3 billion in recent years from the defense budget, according to the report titled “Commissaries and Exchanges: DOD and Congress Need More Reliable Information on Expected Savings and Costs of Consolidating the Defense Resale Organizations.”
The Army and Air Force Exchange Service, known as AAFES, reported $8.7 billion in revenue in fiscal year 2018, according to its website. During the past 10 years, more than $2.3 billion has gone into quality-of-life programs that promote military readiness and resiliency as well as those that offer activities for children and families.
Just 3% of the AAFES budget comes from appropriated funds and primarily covers the cost of transporting goods overseas, according to the AAFES website. The Navy and Marine Corps entities operate in a similar fashion.
By law, the two types of organizations must operate separately. The DOD’s analysis on merging the organizations triggered Congress to include a review of the task force’s work by the GAO in the National Defense Authorization Act for fiscal year 2020.
The Military Officers Association of America, along with a coalition of about 30 other military and veteran organizations, expressed concerns about the merger when the task force’s business analysis was released in late 2018, said Eryn Wagnon, director of government relations for the MOAA.
“There really wasn’t a lot of transparency about how they were doing the analysis, if it was total and complete, and how they were funding this venture with it being quite a hefty amount,” she said. “Most of our concerns came from ensuring that the [morale, welfare and recreation] fund wasn’t impacted by these merger projects and also ensuring that any seed money that was needed for the merger didn’t impact military families either.”
The biggest concern is that a merger would take funds from family and morale programs to prop up the DeCA, which doesn’t perform as well financially, Wagnon said.
Any customer of the stores can see and experience the differences in the two types of stores and the products they sell, Wagnon said. The first overestimate in savings identified by the GAO report was the potential costs reductions related to selling high amounts of similar products. Savings related to the cost of goods accounted for 70% of all savings identified by the task force, according to the report.
A side-by-side comparison of one of the retail organizations, which wasn’t named, and DeCA showed they share less than one-third of their products. The report had similar concerns about vendor overlap between the grocery and retail organizations.
“Although the task force stressed the importance of a conservative estimate in both its business case analysis and in meetings with us, our assessment of the assumptions and methodology for estimating savings from the cost of goods sold found that a more conservative approach could have been used to better ensure estimated savings were not overstated,” wrote Elizabeth Field, the author of the report.
The $500 million cost of consolidating focused on two main areas: the development of new, common information technology systems and the location of a new headquarters for the consolidated organization. While the DeCA and Navy and Marine exchanges are headquartered in Virginia, the AAFES is headquartered in Dallas.
However, the task force didn’t offer a cost estimate or range of estimates to consolidate into one business headquarters because “costs will vary widely depending on the chosen location,” according to the report.
“Without developing and providing a range of relocation cost estimates from the least expensive option to the most expensive, decision-makers in DOD and Congress will not be fully informed about the costs of consolidation, which is necessary information for deciding whether to consolidate the four defense resale organizations,” Field wrote.
Wagnon said MOAA found this omission “shocking.”
In its analysis of information technology systems, the task force estimated it would cost between $292 million and $352 million to develop five types of systems needed for a merger, but the GAO report found this estimate was only based on partial upgrades instead of major upgrades and replacements.
“We were already concerned with projections made for it costs. The GAO report solidified our position,” Wagnon said. “We aren’t against reform. Improvements are needed and welcomed. But this seemed like a fast-moving training with a decision made before analysis was done.”
When the task force presented its analysis to the military departments, each concurred, but provided comments and detailed concerns that were not given to Congress when presented with the information in April 2019, according to the GAO report. The Navy first did not agree with the merger and commented the task force’s analysis was “flawed beyond repair,” but later changed its position subject to several comments and clarifications.
Each military branch expressed concern about losing the funds raised through their exchange stores that support morale, welfare and recreation programs on base. All four of the retail organizations expressed concerns about the task force’s analysis when representatives met with the GAO for the report, Field wrote.
The report recommends the Pentagon share these concerns with Congress as well as any of the task force’s responses to them.
MOAA intends to share its concerns with lawmakers and believes this report reinforces their initial take of the merger analysis, Wagnon said.
“I really hope this GAO report is education to them as a Congress and we’ll be sure to relay our concerns to them,” she said. “In the end, anything with the commissary does need congressional approval so we’re hoping this helps bring greater perspective to members of Congress.”
Thayer.rose@stripes.com Twitter: @Rose_Lori
