Commissaries and Exchanges: DOD and Congress Need More Reliable Information on Expected Savings and Costs of Consolidating the Defense Resale Organizations

GAO-20-418 Published: Apr 30, 2020. Publicly Released: Apr 30, 2020.
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Fast Facts

DOD operates commissaries (grocery stores) and exchanges (retail stores) that sell products to servicemembers, their families, and retirees.

DOD wants to consolidate the four organizations that operate commissaries and exchanges into a single organization, to eliminate redundancies and save money. However, DOD may have overestimated the savings and underestimated the costs of consolidation in its business case analysis. DOD also did not provide Congress with comments and concerns from the military services on consolidation.

We recommended that DOD reassess and update its savings and cost estimates and provide additional information to Congress.

Commissary and Exchange Stores at Marine Corps Base Quantico, Virginia

Commissary

Commissary

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Highlights

What GAO Found

A Department of Defense (DOD) task force's business case analysis for consolidating the defense resale organizations—the Defense Commissary Agency (DeCA), the Army and Air Force Exchange Service, the Navy Exchange Service Command, and Marine Corps Community Services—may not provide reliable savings and cost estimates. These organizations sell groceries and retail goods to servicemembers, their families, and retirees. The task force recommended consolidating the four resale organizations into a single organization, estimating “net savings” (i.e., savings minus costs) of about $690 million to $1.3 billion during the first 5 years. However, the task force may have overestimated savings and underestimated costs.

Savings from reducing the cost of goods sold. The task force estimated that DOD would save several hundred million dollars annually by reducing the cost of purchasing goods that are resold in stores. Specifically, the task force multiplied the fiscal year 2017 total cost of goods sold for all four resale organizations by industry benchmarks, reasoning that mergers lead to more savings when merging organizations sell a high amount of identical products. However, task force data show that DeCA and the exchange organizations have limited identical products; the overlap between DeCA products and those of at least one exchange organization amounts to less than one-third of the total cost of goods sold. Thus, multiplying the benchmarks by the total cost of goods sold for all four organizations may not have been appropriate.

Information technology (IT) costs. The task force estimated the costs of developing new, common IT systems to operate a consolidated resale organization to be between $326 million and $401 million, about 50 percent of estimated consolidation costs. The task force stated that it based IT cost estimates on data resale organizations provided for major upgrades or system replacements. But GAO found that about 40 percent of the IT cost estimate was based on minor upgrades or partial replacements, not major upgrades or system replacements. Thus, the estimate may be understated.

Headquarters relocation costs. According to the task force, there will be costs if DOD decides to relocate the four defense resale organizations to a new headquarters location. However, the task force did not include cost estimates for relocation in its business case analysis.

According to federal law, the operation of the commissary and exchange systems may not be consolidated unless authorized by Congress. Until the task force reassesses and updates, as necessary, its savings and costs estimates, DOD and Congress will not have reliable information to consider resale consolidation.

The military departments officially concurred with the business case analysis, but provided written comments detailing fundamental concerns with the analysis, such as the use of proprietary industry benchmarks and the estimated savings and costs. In April 2019, DOD reported to Congress that the military departments agreed with consolidation, but did not disclose the accompanying comments. Without more complete reporting of those comments, Congress has limited visibility of the views of the organizations involved in a potential consolidation.

Why GAO Did This Study

DOD operates about 240 commissaries and 2,500 exchanges that sell groceries and retail goods and services to servicemembers, their families, and retirees. Commissaries and exchanges are operated by four resale organizations, and in November 2018 a DOD task force completed a business case analysis on consolidating those organizations.

The National Defense Authorization Act for Fiscal Year 2020 included a provision for GAO to review DOD's business case analysis. This report evaluates the extent to which (1) DOD's business case analysis for consolidating the four resale organizations provided reliable savings and cost estimates and (2) the military departments concurred with the business case analysis and DOD shared their accompanying comments with Congress.

GAO evaluated the business case analysis against DOD- and GAO-identified key elements of economic analyses; reviewed comments on the business case analysis; and interviewed DOD officials.

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Recommendations

GAO is making four recommendations, including that DOD reassess and update as necessary its estimates for consolidation savings and costs, and provide additional information to Congress on the military departments' comments on the November 2018 business case analysis. DOD concurred with three recommendations and provided updated estimates. DOD did not concur with the last recommendation. GAO continues to believe providing such information is beneficial, as discussed in the report.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense The Secretary of Defense should ensure that the DOD Chief Management Officer direct the task force to reassess its approach to estimating savings from cost of goods sold—to include reassessing its use of the cost of goods sold for all four defense resale organizations rather than, for example, just for the three exchange organizations—and make any necessary adjustments to its savings estimates for consolidation and provide that updated information to Congress. (Recommendation 1)
Closed – Implemented
DOD concurred with this recommendation. In its written comments on our report, DOD provided revised savings estimates that exclude the Defense Commissary Agency's cost of goods sold from its methodology and that show net savings ranging from $309 million to $739 million in the first 5 years of consolidation, followed by $255 million to $457 million per year thereafter. These figures are about 44 percent to 55 percent lower than the business case analysis's estimate for the first 5 years and about 32 to 35 percent lower per year thereafter. By providing these revised savings estimates in its comment letter that was included in our report to Congress, we believe that DOD has addressed the intent of the recommendation. With this additional information, Congress will be better positioned to weigh the potential impacts of possible consolidation of the defense resale system.
Department of Defense The Secretary of Defense should ensure that the DOD Chief Management Officer direct the task force, in consultation with the resale organizations, to reassess its methodology for estimating IT costs of consolidation, and make any necessary adjustments to its range of IT cost estimates and provide that updated information to Congress. (Recommendation 2)
Closed – Implemented
DOD concurred with this recommendation. In August 2020, DOD stated that it had intended to convene an IT working group to reassess the methodology and begin detailed IT consolidation planning, but the COVID-19 pandemic delayed this plan. DOD also said that the working group would form as soon as conditions allowed and estimated that the working group would complete its work by October 31, 2020. In May 2021, DOD stated that the Deputy Secretary of Defense had reassigned responsibilities to address this recommendation to the Office of the Under Secretary of Defense for Personnel and Readiness, because the DOD Chief Management Officer position had been disestablished by the National Defense Authorization Act for Fiscal Year 2021 (NDAA) and the task force had disbanded. DOD also stated that the NDAA directed the department to update the original business case analysis and address each of GAO's recommendations, to include the development of a new estimate for IT costs. In August 2021, DOD provided this updated business case analysis to Congress, along with a report that summarized the results of the updated analysis. In that report, DOD stated that it no longer supported consolidation of the resale organizations because consolidation would not be feasible without enormous cost and disruption to the organizations that would greatly exceed any potential savings and efficiencies. DOD further stated that it had underestimated IT integration costs in the 2018 business case analysis. Specifically, in its updated business case analysis DOD estimated that IT costs would be approximately $926 million, compared to the original $326 million to $401 million estimate in the 2018 business case analysis. By providing these revised IT cost estimates to Congress, DOD has addressed this recommendation.
Department of Defense The Secretary of Defense should ensure that the DOD Chief Management Officer direct the task force to develop a range of cost estimates for relocating the defense resale organizations, and adjust its range of cost estimates for consolidation and provide that updated information to Congress. (Recommendation 3)
Closed – Implemented
DOD concurred with this recommendation. In its written comments on our report, DOD provided three possible courses of action for relocation, along with corresponding cost estimates. These possible courses of action, from least expensive to most expensive, are: (1) maintain operations at all four existing locations (no cost); (2) maintain commissary operations at the Defense Commissary Agency's headquarters, perform all exchange functions at the Army and Air Force Exchange Service headquarters, and close the Navy Exchange Service Command and Marine Corps Community Services headquarters (one-time costs of $5.5 million and recurring annual costs of $1.3 million); and (3) create a new headquarters to perform all commissary and exchange operations near Washington, D.C. (one-time costs of $19.6 million and recurring annual costs of $19.7 million). By providing these cost estimates its comment letter that was included in our report to Congress, we believe that DOD has addressed the intent of the recommendation. With this additional information, Congress will be better positioned to weigh the potential impacts of possible consolidation of the defense resale system.
Department of Defense The Secretary of Defense should ensure that the DOD Chief Management Officer provide additional written information to Congress on the comments and concerns from the military departments and resale organizations on the task force's November 2018 business case analysis, as well as the task force's response to those comments and concerns. (Recommendation 4)
Closed – Not Implemented
DOD did not concur with this recommendation. In its written comments on our report, DOD stated that all the submitted comments on the November 2018 Business Case Analysis and the task force responses were considered in the department's decision-making process, but were not included as part of the business case analysis in order to protect DOD's internal deliberations. The Fiscal Year 2021 National Defense Authorization Act disestablished the Chief Management Officer position and the task force was subsequently disbanded. Further, in August 2021, DOD submitted an updated Business Case Analysis and a summary report to Congress that stated that the department re-evaluated the recommendation in the 2018 Business Case Analysis and determined that consolidation of the resale organizations is not feasible without enormous cost and disruption to the organizations that would greatly exceed any potential savings and efficiencies gained through a consolidation. DOD will take no further action toward consolidation and, as such, the need for the recommendation no longer exists. We consider this recommendation to be closed as not implemented.

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