ROA opposes merger of military exchanges and commissaries; supports improving commissary efficiencies
Among its fifteen recommendations, the Military Compensation and Retirement Modernization Committee chartered by Congress to suggest ways to modernize the uniformed services’ compensation and retirement system, arrived at a recommendation to merge DoD’s Commissaries and Exchanges under a consolidated “Defense Resale Activity (DeRA).
ROA opposes the proposed merger of the Exchange system with the Defense Commissary Agency (DeCA) into a new Defense Resale Activity (DeRA) until DeCA makes its operations significantly more efficient, realizing savings in the hundreds of millions of dollars and generating increased revenues from improved practices used routinely in American grocery retail.
ROA opposes merger until these improvements are made precisely because the two entities are valued by military families: merger of a dynamic, high-performance non-appropriated fund Exchange with a change-resistant, bureaucratic, tax-supported grocery chain is more likely to destroy the competitiveness (viability) of the former than enhance the performance of the latter. Both must be made as competitive as possible within their revenue models before merger is advisable (private-sector mergers, managed by skilled executive teams, fail as often as they succeed, and these mergers involve companies using the same revenue model).
Once efficiencies in the Commissary are made, “back-office” collaboration would yield further efficiencies. Merger might then be suitable.
Exchange officials led by a retail veteran CEO increased earnings in a shrinking market (military downsizing) from $272 million in 2011 to $373 million in 2014; they carry some credibility. Their success raised dividends going from the Exchange to military Morale, Welfare and Recreation activities. They show that the Commissary can save, without the extraordinary risk and expense of merger, a tremendous amount of money through a mix of highly feasible efficiencies: variable pricing, private labeling, Military Star card acceptance, interpreting rule sets less narrowly, eliminating unnecessary investment in new facilities and technologies, cutting overhead and standardizing compensation (appropriated activities typically offer more aggressive pay than non-appropriated entities).
The establishment of any new federal bureaucratic layer should be undertaken with great caution and regard for unintended second- and third-order effects. Merger, risky in the best of circumstances, will almost certainly stifle competitiveness: will senior leaders in the Defense Resale Agency – who are pitted in the market against directly with skilled retail giants – have decisive experience in the retail jungle?
In the unequivocal success of the Exchange we see the effect of the right person at the top. A pivotal concern is that the wrong skill set will be at the very top of a DeRA: a Defense official with little or no retail expertise. The argument that a DeRA chieftain must understand the “ways of the building” is better suited for the occupant of the number-two job. An inadequate DeRA leader will produce merely a larger version of the Commissary, competitive only because of its discounts, courtesy of the taxpayer’s generosity. Ultimately, the taxpayer may decide such a benefit is not sustainable, and who then will lose out? By contrast, the Exchange system, under the direction of a savvy private-sector veteran of retail P&L leadership, has achieved massive efficiencies and improvements.
The Exchange must not be dragged back by linkage with a lower-performing bureaucratic operation; that would in turn decrease dividends going from the Exchange to military Morale, Welfare and Recreation activities. Instead the Commissary must undergo tough reform, perhaps led by the Exchange leadership working with new DeCA leadership drawn from grocery successes, such as Giant, H-E-B, Wegmans, Whole Foods, etc. At that point and only then, some “back office” consolidation between it and the Exchange would perhaps make sense.
ROA urges Congress to direct the Commissary to achieve efficiencies by reducing capital expenditures and updating the rules they use to conduct business so they are more in line with how other successful grocery corporations for improving service.
As the Exchange requested of DoD in August 2014, ROA urges DoD to authorize honorably discharged veterans to shop the Exchanges online (approximately 18 million potential customers), potentially quadrupling the market and significantly increasing funds for Morale, Welfare and Support activities benefitted by Exchange revenues.
Jeffrey E. Phillips
ROA Executive Director