Background The commissary and exchange systems were established to provide articles and services necessary to the health, comfort, and convenience of service personnel. The commissary system was established in 1825 when Congress authorized the Army to sell food and other items at cost to officers at isolated frontier posts. In 1866, the commissary system was expanded to include enlisted personnel. Commissaries generally sell subsistence articles, such as food and staple items. The basic business of the exchange is comparable to that of a department store. Exchanges are not permitted to operate commissary-type full-line food operations unless no other source of food necessities is available. The commissary and exchange systems generally are operated under the authority of 10 U.S.C. Sections 4621, 7601-7605, and 9621, as implemented by DOD Directives 1330.9 and 1330.17. Approximately $500 million was appropriated in the DOD budget in FY 1982 to subsidize the commissary system, 227 stores in the continental United States (approximately $300 million) and 141 stores overseas, including Alaska and Hawaii (approximately $200 million). Appropriations in FY 1982 for the exchange system were approximately $19 million for 180 exchanges in the continental United States and $176 million for 137 stores overseas, including Alaska and Hawaii. For the overseas operations of both commissaries and exchanges, the largest portion of the appropriated funds goes to transport the items to the stores. Methodology The Task Force analyzed DOD data on commissary and exchange sales revenue and operating costs, including subsidies from appropriated funds. Special attention was paid to the 1982 Triennial Certification of Military Commissary Stores. Revenue and cost data were also gathered on commercial food stores. The Task Force also analyzed previous DOD and General Accounting Office (GAO) reports on commissary and exchange operations as well as pertinent DOD directives. We also analyzed data on comparative disposable incomes for military and civilian Government employees as presented in a 1982 GAO briefing on that subject. Findings After a general review of the commissary and exchange systems, it appears to the Office of the Secretary of Defense (OSD) Task Force that there are substantial opportunities for cost savings and greater efficiencies in facility utilization. In general, the exchanges are profitable operations. In FY 1981, with sales revenue of $6.1 billion, the exchanges provided an estimated $149 million to DOD morale, welfare, and recreational programs (MWR), which include child care centers, sports programs, arts and crafts programs, and teen and dependent youth activities. The exchange systems use appropriated funds to pay some of their operating costs. In contrast, the U.S. commissary system is subsidized at a rate 15 times that for the exchanges, over 90 percent of which represents the cost of civilian personnel. Product prices in the commissaries are based on the actual cost to the commissary plus a surcharge of 4 to 6 percent, which covers only a portion of the operating expenses. Each commissary must be justified on the basis of at least one of the following three criteria: unavailability of adequate commercial food stores, i.e., with the same variety of food products; unavailability of convenient commercial food stores, i.e., within 15 minutes' travel time; and unavailability of at least two comparable commer- · items specified by the Bureau of Labor statistics. DOD conducts a triennial survey of all commissary stores in the continental United States. In the 1982 triennial survey, the third criterion, price, was the sole justification for 62 percent of existing commissaries. The survey indicated that commissary prices averaged about 30 percent less than commercial prices. Another 15 percent of the commissaries were justified on the basis of criterion 1, including those in metropolitan areas such as Fort Knox (Louisville, KY), Fort Benning (Columbus, GA), and NAS Alameda (Oakland, California). The remaining 23 percent of the commissaries were justified because commercial stores were too far away. However, in a 1976 GAO survey of 62 U.3. commissaries, approximately 92 percent were found to be within 10 miles of at least two comparable commercial supermarkets. The problem is that criterion 2 is based on driving time rather than distance, and the 15-minute maximum appears arbitrary. Exhibit II-20 at the end of this issue summarizes the results of the 1982 triennial survey. We examined the 1982 triennial survey to determine which groups were the heaviest commissary users. Of the total estimated 1981 patronage of 3.4 million, approximately 59 percent (2.0 million) were retirees. This indicates a high usage by people who are not assigned to a particular military installation. Since the price benefit was the prevailing justification for continuation of most commissaries, it seems that commissaries have come to be regarded as a compensation benefit. In evaluating the justification of commissaries from this perspective, the OSD Task Force compared the relative compensation levels of civil service Government employees and military employees to determine to what extent, if any, military employees are under-compensated. The information in Exhibit II-21 is derived from a 1982 GAO briefing on income of military and civilian Government employees. Using disposable income as a point of comparison, it appears that in every comparable grade level grouping, the military employee has an advantage over the civilian counterpart. In fact, for the nine military and civilian categories compared here, on average, the military employee enjoys a 13 percent advantage in disposable income over the civilian counterpart. This is due, in part, to the military's tax-free allowances for food and housing. While the military compensation level may once have been significantly below that of civil service employees, it appears to the OSD Task Force that this is no longer the case. Conclusions It is obvious that commissaries are now justified on the basis of criteria which are significantly different from those used to establish the commissary system. We question the use of criterion 1 (unavailability of adequate commercial food stores) to justify commissaries in metropolitan areas. The criterion is stated broadly. Yet, it defies reason to assume that metropolitan areas in the 1980s do not have adequate full line commercial food stores. are The fact that only 40 percent of commissary users active duty personnel calls into question the justification criteria based on convenience for personnel assigned to a particular military installation. In particular, this fact raises questions about the appropriateness of criterion 2, which defines "convenience" as a minimum 15 minutes' travel time from a military installation to the nearest commercial food store. Approximately 60 percent of the commissary users do not live on a military base. Also, it appears that, in general, military employees have higher disposable income levels than their civil service counterparts. Accordingly, there appears to be no reason for the taxpayers' subsidy of the food purchases of military employees. The OSD Task Force was unable to find justification for the use of 20 percent as the minimum price advantage a commissary must offer. Criterion 3 implies that if available commercial food stores offer prices which are, on average, more than 20 percent greater than commissary prices, the commercial food store prices are uncompetitive and unreasonable, and the commissary is justified. According to the 1982 triennial survey, the average price advantage of commissary stores over commercial food stores (net of the commissary stores' 4 to 6 percent surcharge) was approximately 29.2 percent. We question the validity of this figure. According to "Food Marketing Outlook," the average supermarket gross margin in 1981 was 22 percent. The bulk of commissary purchases are made under Defense Personnel Support Center (DPSC) contracts which specify that the commissaries be given the lowest price offered to commercial purchasers in the same region. This implies, therefore, that the percentage advantage reported for criterion 3 should be a very close approximation of commercial stores' gross margins. We found no evidence of commercial food stores which had operations comparable to those of commissaries and enjoyed a 33 percent gross margin.. In the spring 1981 Navy Commissary Store Retail Price Comparison Survey Results, the average percentage savings in Navy commissary stores in the continental United States (as compared to average commercial supermarket prices) was 20.8 percent. Net of the 4 to 6 percent surcharge, the advantage was 14.8 to 16.8 percent. This is a more convincing figure in our view, as it more accurately reflects the known economics in the supermarket industry. Exhibit II-22 at the end of this issue provides a comparison of average operating costs as a percent of sales for the Navy commissary system and for commercial supermarkets. As indicated in the exhibit, personnel costs are approximately 15 percent of sales for the food retail industry and 0 percent for the Navy commissaries. The difference results because DOD appropriated funds are used to cover commissaries' personnel costs. The actual price differential, or price advantage of the commissaries, is approximately 15 percent or the amount of the budget subsidy. We have concluded that the data reported to DOD for criterion 3 (price) justification of commissaries are largely unverifiable. An audit of individual commissary operations would probably reveal price advantages much lower than the average 34 percent reported in the 1982 triennial survey. Further, it appears that the minimum 20 percent advantage used to justify commissaries under criterion 3 is totally arbitrary. If the budget subsidy for personnel costs were discontinued (approximately 15 percent of average commissary sales), it appears that the price advantage of the commissaries vis-a-vis commercial supermarkets would be eliminated. Recommendations OSD 32-1: DOD should terminate the operation of the commissary system in the continental United States. In those military installation areas where there are no adequate, comparable commercial food stores, the exchange system should be allowed to operate a full-line food operation. In implementing this recommendation, a special study should be made of the six Hawaii commissaries to see whether their continuance is justified. The 1982 triennial survey revealed that three of these commissaries were justified based on the price criterion only. Savings and Impact Analysis We have estimated savings as the reduction in DOD appropriations which would result if commissary operations were discontinued in the continental United States. Although commissary funds do not appear in the DOD budget in this format, we estimate that for FY 1982, funds were appropriated as follows: |