Commissary pricing formula targeted
Replacement plan for cost plus 5% has twin goals: Trimming taxpayer support while maintaining savings for patrons
D efense officials appear ready to ask Congress to repeal a law that commissaries must sell products at cost plus 5 percent, a formula that, for decades, has ensured commissary shoppers everywhere pay the same prices.
Officials have drafted a replacement formula that would allow prices to vary from store to store to meet new twin goals: reducing taxpayer support for commissaries while maintaining still attractive savings for patrons.
Variable pricing would seek to keep savings consistent across the commissary system by pegging local commissary prices for a market basket of goods at some target percentage level below prices of “lowest price” competitors nearby, such as Wal-Mart stores.
Critics of the plan, including suppliers and manufacturers of commissary products, say it would cut shopper savings overall and hit particularly hard those patrons who live in high-cost areas of the country.
That’s because setting grocery prices at, for example, 15 percent below competitive off-base retailers would impact shoppers differently if assigned to high-cost San Diego than to low-cost Fort Sill, Okla.
Military members of equal rank and years served get the same basic pay regardless of location. If grocery prices are set not by cost but tied to local prices, the San Diego shopper would see a higher proportion of pay go to groceries than the shopper at Fort Sill.
Defense officials contend that, through variable pricing, shopper savings can be preserved and stores can operate with businesslike efficiency. That, in turn, would allow cuts in the $1.4 billion annual appropriation of the Defense Commissary Agency.
“DoD’s stated objective all along has been to reduce appropriations for the commissary benefit,” said Candace Wheeler, spokeswoman for The Coalition to Save Our Military Shopping Benefits.
“The problem is that their ‘business speak’ does not match their ‘budget speak,’” Wheeler said. Defense officials use “a myriad of business arguments … about a better commercial approach. The fact is they want to increase the costs to military patrons and make them feel good about it.”
The idea of replacing cost plus 5 percent with variable pricing is presented in DoD’s draft response to recommendations for reforming on-base store operations from the Military Compensation and Retirement Modernization Commission.
Defense officials intend to reject, at least for now, the commission’s call to consolidate DeCA and the three military exchange services into a single defense resale system. They note that DeCA and exchange services, which run base department stores and a host of other retail outlets, serve different purposes. Commissaries offer groceries at a discount and rely on appropriated funds. Exchanges sell products and services that generate profits and help to fund on-base morale, welfare and recreational activities. Exchanges get little taxpayer support.
A merger now, before adopting common business processes and developing a solid business plan, would be impractical, officials contend. But they also assert that, with some legislative relief, including repeal of cost-plus-5-percent pricing, they can maintain current shopping benefits and save money for taxpayers. To do this, they say they need more flexibility in how
commissary products “are sourced, where they are sold and how they are priced.”
Requiring that all goods be sold at cost plus a 5 percent surcharge is a disincentive to efficient business practices, says DoD’s draft document. Any retailer forced “to charge the same markup across its entire stock assortment will not be able to achieve the same efficiencies as a private-sector entity operating within a profitdriven market,” it says.
Congress ordered DoD a year ago to commission a study of the military resale system by business experts. That study by the Boston Consulting Group is almost complete. An early draft identifies actions to save DeCA as much as $700 million a year.
Topping its list of “winwin opportunities” for taxpayers and patrons is transition from cost plus 5 percent to variable pricing. This would allow the introduction of privatelabel goods if Congress removes a mandate that commissaries stock only national brands.
Critics say many costs targeted by consultants are the unavoidable expense of delivering a prized shopping benefit to the military.
One part of the Boston Consulting Group study that can’t thrill DeCA casts doubt on its claim of 30 percent average savings. Most patrons don’t believe that claim, the report says, citing its own survey, and the claim doesn’t survive price comparisons with popular grocery stores off base.
“When compared to the lowest priced nearby competitor, we believe most patrons are actually experiencing 15 percent (to) 20 percent savings in (continental U.S.) locations,” the report says.
It cautions against narrowing savings too sharply. One finding of its patron survey is that a 5 percent price increase would shift 30 percent of commissary spending elsewhere.