Should the military exchanges run the commissary system? AAFES has a plan

This article was updated July 22 to reflect that AAFES submitted a concept, not a proposal.

The Army and Air Force Exchange Service is making a preemptive strike against the possible privatization of commissaries with a new proposal that would put their control into the hands of the services' military exchanges and installation commanders.

AAFES submitted the concept to defense officials the week of July 11. According to documents obtained by Military Times, AAFES would be involved in a “government-owned, contract-operated” structure that combines military resale experts with leading commercial grocery retailers and distribution experts. A commercial retailer would operate the stores at larger bases under contract with and under the jurisdiction of the exchanges, while the exchanges would directly operate smaller commissary stores.

On Navy and Marine Corps installations, those services’ exchanges would have similar operating agreements. A source said officials with those exchange services are remaining neutral on the AAFES idea, which is in its infancy. The idea would require the support of all the service branches.
“It’s an interesting idea. But AAFES can’t do this alone, because AAFES doesn’t have a presence everywhere there are commissaries,” said Joyce Raezer, executive director of the National Military Family Association. “How would they do this without the commitment of the other exchanges? And if not, what does this do to the commissary benefit?”

A source familiar with the concept said the plan stops short of consolidating commissaries and exchanges.

The stores still would be separate, but functions above the store level would be “streamlined,” and there would be fewer managers. Defense officials have said publicly that they've ruled out merging the commissaries and exchanges.

The goal is to provide “a grocery solution that preserves military resale while lowering the [taxpayer] burden,” according to the AAFES documents. The plan would cut the amount of taxpayer dollars required by half, from the current $1.4 billion a year to between $700 million and $800 million.

Over the past few years, Defense officials have attempted to cut the operating budget of the commissary system, but lawmakers have not allowed the cuts. Legislation is currently working its way through Congress that would allow commissaries to end their decades-old model of selling groceries at cost to customers, plus a 5-percent surcharge that pays for store construction and renovations. If the legislation becomes law, commissary stores will be able to mark up the prices of some items to reduce the taxpayer dollars required. The commissary system will also start introducing its own private label brand of some items later this year.

This current concept was submitted by AAFES in response to a Defense Department request for information issued in May, calling on private companies to provide information about their interest in and ability to take over the operation of all or part of the commissary system. The deadline for submitting information is July 15. It’s not a contract solicitation, but simply a request to find out what ideas and proposals are out there. And a source said the AAFES concept is designed to be an alternative to whatever other ideas may be submitted.

AAFES spokeswoman Julie Mitchell confirmed that AAFES has responded to the RFI, but could provide no further details. Information was not immediately available from DoD officials about the AAFES proposal or whether other proposals have been submitted.

AAFES' concept involves a reduction in the number of personnel required above the store level by combining many functions. The commissary employees would be converted from the current civil service system to the nonappropriated fund system, which provides the pay and benefits to exchange employees. The plan would preserve “soft landings for DeCA’s [taxpayer funded] employees” and convert them to the NAF system over time, as there are vacancies, according to the documents.

Besides reducing the overhead costs of personnel, DeCA and the exchanges could also combine the buying power of the commissaries and exchanges, and buying in larger quantities could benefit the customers through lower prices.

While centralizing some functions, the plan would bring back more control to installation commanders over the retail operations on their bases, giving commanders the ability to provide input similar to what they do with their service's exchange system, a source said. It would provide a single point of contact and accountability on each installation to better serve commanders and streamline reporting, according to the documents.

The fate of the military exchanges is tied to the future viability of commissaries. For example, during sequestration when commissaries were closed, there was a 17 percent decline in exchange sales because of the reduction in foot traffic.

Earlier this year, senators voted to quash an effort to require a pilot program testing privatization at no more than five large commissaries.

But with this request for information related to privatization, DoD is carrying out a mandate from Congress last year to study the possibility of privatizing all or part of the commissary system.

The DoD request for information regarding privatization is asking companies whether their business could fully perform all the functions of the commissary agency, or if they would need to partner with other businesses. In addition, the request asks whether the company could perform the functions without any subsidy from the government and still maintain the customer savings as well as the quality of products and service, plus a number of questions related to specific aspects of the commissary agency’s operations.

Many concerns have been raised about privatizing commissaries. Because private companies make profits and the commissaries don’t, advocates have said, it’s unclear what the benefit would be for the commissary customer. According to the commissary agency, customers currently receive an average of 30 percent savings at commissaries, compared to stores in the civilian sector.

And while some companies might be willing to take on the operation of larger commissaries, more than two-thirds of commissaries operate in areas where it would not be profitable for commercial entities.

A source said the AAFES plan aims to address this issue by taking on the direct operation of the smaller and often remote commissaries, including those overseas. In addition, there is anticipated savings in logistics for a variety of reasons, including the fact that commissaries and exchanges are often located near each other.


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Karen Jowers covers military families, quality of life and consumer issues for Military Times. She can be reached at [login to see] .